<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1997.
REGISTRATION NO. 333-34439
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRECISION AUTO CARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 7539 54-1847851
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
748 MILLER DRIVE, S.E.
LEESBURG, VIRGINIA 20175
(703) 777-9095
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
PETER KENDRICK
748 MILLER DRIVE, S.E.
LEESBURG, VIRGINIA 20175
(703) 777-9095
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN B. FRISCH, ESQUIRE JOEL J. HUGHEY, ESQUIRE
MILES & STOCKBRIDGE, ALSTON & BIRD LLP
A PROFESSIONAL CORPORATION 1201 W. PEACHTREE STREET
10 LIGHT STREET ATLANTA, GEORGIA 30309-3424
BALTIMORE, MARYLAND 21202 (404) 881-7490
(410) 385-3507
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
Registration Statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration Statement
for the same offering: [ ]
If delivery of the prospectuses is expected to be made pursuant to Rule
434, check the following box: [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(2)
<S> <C> <C>
Common Stock, par value $.01 per share...................... $29,601,000 $152.10
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) of the rules and regulations under the
Securities Act of 1933.
(2) Represents the difference between the total registration fee and the amount
already paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INSIDE FRONT COVER: A map of all existing retail and manufacturing
operations for Precision Tune Auto Care, Precision Auto Wash and Precision Lube
Express.
GATEFOLD: Photos of the auto care, car wash and lube facilities as well as
artist renderings of future prototype centers.
INSIDE BACK COVER: Product photos from the facilities -- i.e. technician
interacting with engine analyzer, receptionist providing maintenance log at
check out, etc.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent certified public
accountants and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION DATED , 1997.
PROSPECTUS
2,340,000 SHARES
PRECISION AUTO CARE, INC.
COMMON STOCK
------------------------
Of the 2,340,000 shares of Common Stock being offered hereby, 2,300,000
shares of Common Stock are being offered by Precision Auto Care, Inc.
("Precision Auto Care" or the "Company") and 40,000 shares of Common Stock are
being offered by certain selling shareholders (the "Selling Shareholders"). The
Company will not receive any proceeds from the sale of shares of Common Stock
offered by the Selling Shareholders. Prior to this offering (the "Offering"),
there has been no public market for the Common Stock of the Company. The initial
public offering price of the Common Stock is estimated to be between $10.00 and
$12.00 per share. See "Underwriting" for information relating to the factors to
be considered in determining the initial public offering price. Application has
been made to have the Company's shares of Common Stock included for quotation on
the Nasdaq National Market under the symbol "PACI" following the consummation of
the Offering.
The shares being offered by the Selling Shareholders will be acquired by
the Selling Shareholders from the Company upon the consummation of the
Combination (as defined herein). The Selling Shareholders may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"). Approximately $18.5 million of the net proceeds the Company
will realize from the Offering will be used to discharge certain indebtedness, a
portion of which is guaranteed by directors and executive officers of the
Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
Total(3)............... $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated to be $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option from the date of
this Prospectus to purchase up to additional shares of Common Stock
on the same terms and conditions as set forth above solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ , $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the Underwriters' right to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of the shares of Common
Stock offered hereby will be made on or about , 1997.
------------------------
A.G. EDWARDS & SONS, INC. FERRIS, BAKER WATTS
Incorporated
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Simultaneously with, and as a condition to, the closing of the Offering, the
Company will acquire, in a series of separate merger and exchange offer
transactions, businesses engaged in (i) franchising and operating automobile
repair and maintenance service centers ("Precision Tune Auto Care"), (ii)
operating self-service and automated car wash centers ("Precision Auto Wash"),
and (iii) franchising and operating fast oil change and lubrication service
centers ("Precision Lube Express"), in exchange for shares of Common Stock (the
"Combination"). Unless the context otherwise requires, all references herein to
the "Company" or "Precision Auto Care" shall mean Precision Auto Care, Inc., a
Virginia corporation, and the Constituent Companies (as defined herein), taken
as a whole, and assume that the Combination has been consummated. See "The
Combination." Unless otherwise indicated, the information in this Prospectus
does not give effect to the Underwriters' over-allotment option. References to
system wide retail sales for Precision Tune Auto Care and Precision Lube Express
and information derived therefrom have been based upon information obtained from
the Company's franchisees.
THE COMPANY
Precision Auto Care is an international provider of automotive maintenance
services which are offered principally as franchise operations and will be
marketed under the "Precision" brand. The Company's operations include: (i)
Precision Tune Auto Care, an international franchisor of automotive service
centers; (ii) Precision Auto Wash, an operator and franchisor of self-service
and touchless automatic car wash centers; and (iii) Precision Lube Express, an
operator and franchisor of modular fast oil change and lube centers. The
Company's management team has developed a strategic plan to capitalize on the
market opportunities currently presented to the Company. These opportunities
include leveraging Precision Tune Auto Care's existing brand name recognition
and current market position into a broader "Precision" brand which symbolizes a
high-quality, convenient and high-value auto services provider. Other
opportunities involve the cross-selling of each service offering to existing and
potential franchisees in order to provide multiple services and one-stop
shopping to its customers and consolidating the automotive maintenance service
industry through strategic acquisitions. Prior to the consummation of the
Offering and the Combination the Company has not conducted any operations, and
none of the Constituent Companies have operated under the Precision Auto Wash or
Precision Lube Express names.
Precision Tune Auto Care is a leading franchisor of automotive service
centers with 556 centers owned and operated by franchisees as of June 30, 1997.
Total system wide retail sales were approximately $207 million for the fiscal
year ended June 30, 1997. Precision Auto Wash operates 35 company-owned
touchless automatic and self-service car wash centers and has developed a
proprietary marketing and operating system which provides computerized central
control of its car wash system. Precision Lube Express owns and franchises
express automobile oil and lubrication centers predicated upon a modular,
above-ground building configuration designed to minimize the up-front cost of
construction and provide flexibility in site selection and relocation. As of
June 30, 1997, there were 21 fast oil change and lubrication centers in
operation. In support of its franchisees and retail services, the Company
manufactures and sells car wash equipment, modular fast oil change and lube
buildings and car wash chemicals. The Company also distributes automotive parts,
equipment and supplies. After giving effect to the Offering and the acquisition
of Worldwide Drying Systems, Inc. described herein, pro forma revenue,
operating income and net income were $43.0 million, $4.6 million and $2.0
million for the year ended June 30, 1997, respectively.
The domestic automotive service, car wash and fast oil change and lube
sectors totaled approximately $100 billion in 1996, up from $95 billion in 1995
and there are approximately 200 million cars and light trucks in the United
States. The Company expects that the market for the services it provides will
continue to grow as more consumers seek to have services performed for them
("do-it-for-me") rather than performing those services themselves
("do-it-yourself"). The do-it-for-me segment of the total automotive service
market increased from 67% to 72% from 1985 to 1995 while the do-it-yourself
segment showed a corresponding decrease. In addition, the automotive service and
car wash industries are highly fragmented. The Company believes that it will be
uniquely positioned to consolidate these industries and grow its market share on
a regional and national basis. The Company further believes that its vertically
integrated manufacturing and distribution capabilities will allow the Company to
consolidate these industries more quickly and cost effectively.
The Company intends to maximize the profitability of individual centers
through superior operating systems and procedures and the advantages associated
with cross-promoting the three Precision-branded services. In addition, the
Company intends to offer the Precision Auto Wash and Precision Lube Express
franchise products to existing Precision Tune Auto Care franchisees and to other
potential franchisees through Precision Tune Auto Care's franchise marketing
organization. To facilitate franchise sales and increase Company revenue growth
and profitability, the Company intends to develop a division of
3
<PAGE>
Company-owned centers, which individually may then be sold as a franchised
operation through a "turnkey program." The Company also intends to continue to
leverage its manufacturing and distribution capabilities, particularly as it
strives to aggressively consolidate, directly or through franchising, the
competing service providers in the automotive service industry.
THE COMBINATION
The Company was formed in April 1997 and will have conducted no business
operations prior to the Combination. Prior to the Combination, the Company will
not have operated under the Precision Auto Wash or Precision Lube Express names.
Simultaneously with, and as a condition to, the closing of the Offering, the
Company will consummate the Combination. The consideration to be paid by the
Company in the Combination will consist of shares of Common Stock as set forth
in the Plan of Reorganization and Agreement for Share Exchange Offers dated
August , 1997 (the "Combination Agreement"), that the Company has entered into
with WE JAC Corporation ("WE JAC"), Miracle Industries, Inc. ("Miracle
Industries"), Lube Ventures, Inc. ("Lube Ventures"), Rocky Mountain Ventures,
Inc. ("Rocky Mountain I"), Rocky Mountain Ventures II, Inc. ("Rocky Mountain
II"), Prema Properties, Ltd. ("Prema Properties"), Miracle Partners, Inc.
("Miracle Partners"), Ralston Car Wash Ltd. ("Ralston Car Wash"), and KBG, LLC
("KBG").
WE JAC is a holding company that conducts its operations through Precision
Tune Auto Care, Inc., a wholly-owned subsidiary. For purposes of this
Prospectus, WE JAC, Miracle Industries, Lube Ventures, Rocky Mountain I, Rocky
Mountain II, Prema Properties, Miracle Partners, Ralston Car Wash and KBG are
hereinafter referred to individually as a "Constituent Company" and collectively
as the "Constituent Companies." In addition, the financial statements of Miracle
Industries, Lube Ventures and Prema Properties have been combined and are
referred to as the "Ohio Group" for purposes of presenting the Selected
Financial Data and the Management's Discussion and Analysis of Financial
Condition and Results of Operations portions of this Prospectus. The Ohio Group
has been presented in this format because Miracle Industries, Lube Ventures and
Prema Properties are under common ownership, control and management. The
financial statements of Rocky Mountain I, Rocky Mountain II, Ralston Car Wash
and Miracle Partners have been combined and presented as "All Other Constituent
Companies" for purposes of presenting the Selected Financial Data and
Management's Discussion and Analysis of Financial Condition and Results of
Operations because prior to the Combination each of these Constituent Companies
has been operating independently from WE JAC and the Company believes that an
independent presentation of information for the entities within that group would
not be material to an investor's understanding of the Combination. The results
of operations of KBG are not included in the Summary Financial Data, the Pro
Forma Combined Financial Statements, Selected Financial Data, or Management's
Discussion and Analysis of Financial Condition and Results of Operations
portions of the Prospectus because that Constituent Company was formed for the
purpose of conveying certain proprietary software and intellectual property and
has never conducted any operations.
The Combination Agreement provides for the allocation of the shares of
Common Stock among the Constituent Companies and their owners. The aggregate
consideration to be paid by the Company in the Combination will consist of
approximately 2,780,695 shares of Common Stock (valued at $30.6 million, based
upon an assumed initial Offering price of $11.00 per share). Approximately
1,145,236 shares of Common Stock (valued at $12.6 million, based upon an assumed
initial Offering price of $11.00 per share) will be paid to persons who are
owners of certain Constituent Companies, and who will be executive officers or
directors of the Company immediately following the Combination. As a result of
this payment of shares of Common Stock and shares such persons will be able to
obtain upon the exercise of options which will be exercisable within 60 days of
the Combination, such persons will beneficially own approximately 25.9% of the
outstanding Common Stock immediately following the Offering after deducting the
shares of Common Stock offered by the Selling Shareholders. The Combination
Agreement also calls for the Company to use approximately $18.5 million of the
net proceeds it realizes from the Offering to discharge certain indebtedness of
the Constituent Companies, a portion of which is guaranteed by certain officers
and directors of the Company. See "Risk Factors -- Control by Management and
Principal Shareholders," " -- Benefits to Management and Principal
Shareholders," "The Combination," "Certain Transactions" and "Shares Eligible
for Future Sale."
The consummation of the Combination is contingent on the satisfaction of
certain customary closing conditions. See "The Combination" for a more complete
description of the Combination Agreement and related transactions.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................... 2,300,000 shares
Common Stock offered by Selling Shareholders.................. 40,000 shares
Common Stock to be outstanding after the Offering............. 5,107,895 shares(1)
Use of Proceeds............................................... To repay certain outstanding indebtedness of the Constituent
Companies assumed in connection with the Combination, to
provide a point of sale management information system for each
center, to assist franchisees in converting to current image
requirements and to fund an acquisition. See "Use of
Proceeds."
Proposed Nasdaq Symbol........................................ "PACI"
</TABLE>
- ---------------
(1) Includes 2,780,695 shares of Common Stock to be issued in the Combination
and 27,200 shares to be issued upon exercise of common stock warrants
simultaneous with the Offering. Does not include 670,100 shares of Common
Stock issuable upon the exercise of stock options granted under the
Company's stock option plans (177,000 of which are expected to be granted
effective at the closing of the Offering) or 351,000 shares of Common Stock
that may be issued pursuant to the Underwriters' over-allotment option. See
"Management -- Compensation Pursuant to Plans" and "Underwriting."
The Company was incorporated in the Commonwealth of Virginia on April 14,
1997. The Company's principal address is 748 Miller Drive, S.E., Leesburg,
Virginia 20175.
SUMMARY FINANCIAL DATA
The following table presents unaudited combined pro forma financial data of
the Constituent Companies. The data should be read in conjunction with the
historical audited and unaudited financial statements and notes thereto of the
individual Constituent Companies and the unaudited Pro Forma Combined Financial
Statements appearing elsewhere in this Prospectus. The presentation of financial
information of the Company in the future will reflect WE JAC as the acquiror of
the other Constituent Companies reflecting the ownership interest in the Company
WE JAC shareholders will receive and the composition of the Company's board of
directors and management immediately following the Combination. Accordingly, WE
JAC will continue to be accounted for using the historical cost basis while
other Constituent Companies will be accounted for at fair value as determined in
accordance with Accounting Principles Board Opinion No. 16. See "Unaudited Pro
Forma Combined Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
--------------------------------------------
<S> <C> <C> <C>
PRO FORMA
PRO FORMA COMBINED
COMBINED AS ADJUSTED
AS ADJUSTED FOR OFFERING
PRO FORMA FOR AND
COMBINED(1) OFFERING(2) ACQUISITION(3)
----------- ----------- --------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Revenue............................................................................ $41,198 $41,198 $ 43,017
Operating income................................................................... 4,205 4,205 4,646
Net income......................................................................... 670 1,859 2,046
Earnings per share(4).............................................................. $ 0.23 $ 0.36 $ 0.39
EBITDA(5).......................................................................... 7,006 7,006 7,505
EBITDA per share(4)(5)............................................................. 2.41 1.34 1.44
Weighted average shares(4)......................................................... 2,912 5,212 5,212
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
--------------------------------------------
<S> <C> <C> <C>
PRO FORMA
PRO FORMA COMBINED
COMBINED AS ADJUSTED
AS ADJUSTED FOR OFFERING
PRO FORMA FOR AND
COMBINED(1) OFFERING(2) ACQUISITION(3)
----------- ----------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET:
Working capital.................................................................... $(7,913)(6) $ 5,034 $ 3,273
Total assets....................................................................... 58,676 62,206 63,406
Total debt......................................................................... 22,325 3,825 5,025
Total shareholders' equity......................................................... 26,737 48,767 48,767
</TABLE>
- ---------------
(1) Pro Forma Combined financial data reflects the Combination of all
Constituent Companies, adjusted to reflect goodwill resulting from the
Combination and amortization thereon; the provision for income taxes for
those Constituent Companies not previously taxed at the corporate level; and
the elimination of management fee income. See "Unaudited Pro Forma Combined
Financial Statements."
(2) As adjusted to reflect the sale of 2,300,000 shares of common stock offered
by the Company at an assumed public offering price of $11.00 per share after
deducting underwriting discounts and estimated offering expenses payable by
the Company, the repayment of $18.5 million of outstanding debt with the
proceeds from the Offering and a $2.5 million upgrade to existing Precision
Tune Auto Care centers, $2.0 million of which will be funded from proceeds
of the Offering and the balance of which will be funded from borrowings
under a revolving credit facility.
(3) As adjusted to reflect the $2.7 million purchase of the capital stock and
the inclusion of the revenues of Worldwide Drying Systems, Inc.
("Worldwide") as if such transaction had occurred on July 1, 1996. The
purchase will be financed by $1.5 million in proceeds from the Offering, and
$1.2 million in seller financing ($261,000 of which will be classified as
current), as described in "Use of Proceeds."
(4) The weighted average shares outstanding used to calculate pro forma combined
earnings per share and EBITDA per share is based on the number of shares of
common stock and common stock equivalents of the Company issued in the
Combination, as if such shares had been outstanding for all periods
presented, and is comprised of the 2,780,695 shares to be issued in
connection with the Combination, 27,200 shares to be issued upon the
exercise of common stock warrants and 104,010 shares outstanding using the
treasury stock method with respect to options and warrants. The weighted
average shares outstanding used to calculate pro forma combined as adjusted
for offering and acquisition earnings and EBITDA per share also includes
2,300,000 shares to be issued by the Company in the Offering.
(5) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. Interest, taxes, depreciation and amortization are significant
components in understanding and assessing the financial performance of the
Company. Management believes that EBITDA is an important measure of the
Company's results of operations because EBITDA represents earnings before
consideration of the Company's capital structure and non-cash charges.
EBITDA should not be considered as an alternative to operating income, net
income, or cash flow from operations as an indicator of the Company's
operating performance. EBITDA measures presented may not be comparable to
similarly titled measures presented by other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for a more complete
discussion of these matters.
(6) WE JAC's line of credit and $8.6 million term loan mature during its fiscal
year ended June 30, 1998 and, accordingly, are included as current
liabilities. All of this debt will be discharged with proceeds from this
Offering.
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby. This discussion also
identifies important cautionary factors that could cause the Company's actual
results to differ materially from those projected in forward looking statements
of the Company made by, or on behalf of, the Company. In particular, the
Company's forward looking statements, including those regarding the successful
integration of the businesses of the Constituent Companies, the effective
implementation of the Company's operating strategy, including the consolidation
of the Company's services under the "Precision" brand and the cross-marketing of
such services, the availability of additional businesses or centers for
acquisition or conversion, the adequacy of the Company's capital resources and
other statements regarding trends relating to various revenue and expense items,
could be affected by a number of risks and uncertainties including those
described below.
ABSENCE OF COMBINED OPERATING HISTORY; OPERATIONS UNDER NEW NAMES
The Company was founded in April 1997, and it will not conduct any
operations of the Constituent Companies as a combined entity until the
Combination is consummated. The Constituent Companies have never operated the
auto wash and lube express businesses under the "Precision Auto Wash" or
"Precision Lube Express" names. Accordingly, there can be no assurance that the
Company will be able to operate profitably or to integrate successfully the
businesses of the Constituent Companies, including their franchising activities,
manufacturing and distributing activities, and Company-owned center operations.
The Company may experience delays, complications and expenses in implementing
and integrating such operations, which delays could have a material adverse
effect on the Company's operations, net revenue and earnings. In addition,
several of the Constituent Companies (Miracle Industries, Prema Properties and
Lube Ventures) did not operate profitably in the most recently presented
periods. The combination of profitable businesses with businesses which have not
been profitable may require additional management time and financial resources
than would otherwise be required to integrate profitable businesses. There can
be no assurance that the Company's management group will be able to manage
effectively the combined entity and to implement effectively the Company's
operating and expansion strategies. Failure to integrate successfully the
Constituent Companies or to implement the Company's operating and expansion
strategies could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Strategy" and "The
Combination." In addition there can be no assurance that operating under the
"Precision" brand will be successful or will not lead to confusion in the market
for consumers, existing franchisees or for potential franchisees.
RISKS ASSOCIATED WITH EXPANSION
The success of the Company's expansion strategy will depend on a number of
factors, including (i) the Company's ability to locate existing businesses or
centers for acquisition, (ii) the availability of adequate financing to develop
or acquire additional businesses and centers, (iii) the Company's ability to
integrate successfully the operations of businesses or centers acquired in the
future into the Company's operations and (iv) the acceptance of the Precision
Auto Wash and Precision Lube Express brand among consumers, current Precision
Tune Auto Care franchisees and potential franchisees. There can be no assurance
that the Company's expansion strategy will be successful, that modifications to
the Company's strategy will not be required, or that the Company will be able to
obtain adequate financing on reasonable terms to develop or acquire additional
businesses or centers. There can be no assurance that future acquisitions will
not have an adverse effect on the Company's financial condition and results of
operations, particularly in the fiscal quarters immediately following the
completion of such acquisitions while the operations of the acquired business
are being integrated into the Company's operations. Once integrated, acquired
operations may not achieve levels of revenues, profitability or productivity
comparable with those achieved by the Company's existing operations, or achieve
standards otherwise expected in the Company's operations. In addition, the
Company will be competing for acquisition and expansion opportunities with
companies that have substantially greater resources. The Company also plans to
expand through direct franchising, franchising through area developers and by
developing Company-owned and operated centers. The success of all of these
expansion activities will depend on a number of factors including the ability of
the Company to establish and maintain support services for new franchisees and
Company-owned centers, to distribute parts and equipment in a timely fashion,
and to provide administrative resources necessary to maintain oversight of
center operations to promote compliance with the Company's concepts and
operating standards. The Company's success will also be dependent upon the
acceptance of the Precision Auto Wash and Precision Lube Express brand among
consumers, current Precision Tune Auto Care franchisees and potential
franchisees. See "Business -- Strategy."
7
<PAGE>
COMPETITION
The Company encounters competition in all aspects of its business,
including the sale by Precision Tune Auto Care, Precision Auto Wash and
Precision Lube Express centers of automotive maintenance and repair services,
self-service and automatic car wash services and fast oil and lubrication
services, respectively. The Company believes that automobile dealerships,
including recently emerging national and regional new and used auto dealerships,
represent Precision Tune Auto Care's principal competitors; however, the Company
also competes with national and regional tire companies, major oil
manufacturers, local service stations, and local and regional automobile repair
specialists. The Company believes the principal competitive factors in its
market are location, name recognition and reputation, quality of service and
price.
The Company also competes with these and other parties in the sale of
franchises, based on startup costs, royalty rates and Company support for the
franchisee, and in the sale of supplies and equipment, based on availability,
price and ability to provide prompt delivery. As the Company grows and expands
into new markets, it will be necessary to establish and maintain local and
regional support services for new franchisees and also parts and equipment
distribution, and the failure to do so in a timely manner could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's manufacturing and distribution divisions compete with a
number of manufacturers and distributors of automotive and car wash supplies and
equipment. Many of these competitors are large and have a substantially longer
operating history than the Company. In addition, although the Company does not
intend to sell its complete proprietary HydroSpray system to unaffiliated car
wash centers, the Company's car wash manufacturing operations will sell certain
car wash equipment to car wash centers unaffiliated with the Company. The sale
of car wash equipment to unaffiliated car wash centers could increase the level
of competition in the Company's car wash business, allow the Company's
competitors to compete more effectively with the Company or reduce the Company's
ability to distinguish itself from its competitors. See
"Business -- Manufacturing and Distribution."
Certain competitors in each of the areas discussed above may have greater
financial resources than the Company, and there is no assurance that the Company
or individual Precision Auto Care centers will be able to compete effectively.
See "Business -- Competition."
RELIANCE ON FRANCHISEES; FRANCHISING
Franchise royalties are a significant component of the Company's revenue
base. Pro forma revenues attributable to franchise royalties were $13.8 million
for the year ended June 30, 1997. Therefore, the Company depends upon the
ability of its franchisees to promote and capitalize upon the Precision Tune
Auto Care, Precision Auto Wash and Precision Lube Express concepts and the
Company's reputation for quality and value. There can be no assurance that the
Company or its area developers will recruit franchisees with the business
abilities or financial resources necessary to open Precision Tune Auto Care,
Precision Auto Wash and Precision Lube Express centers on schedule or that the
franchisees will conduct operations profitably and in a manner consistent with
the Company's concepts and standards. In addition, the Company's growth strategy
is dependent in part upon the acceptance of the Precision Auto Wash and
Precision Lube Express brands among its existing Precision Tune Auto Care
franchisees. None of the existing Precision Tune Auto Care franchisees have been
offered the Precision Auto Wash or Precision Lube Express franchises. In
addition most of the existing Precision Tune Auto Care centers do not have the
required space to add a Precision Auto Wash or Precision Lube Express to their
existing center site. Accordingly, there can be no assurance that Precision Tune
Auto Care franchisees will become Precision Auto Wash or Precision Lube Express
franchisees. See "Business."
The Company is subject to various state, federal and international laws
relating to the franchisor-franchisee relationship. The failure by the Company
to comply with these laws could subject the Company to liability to franchisees
and to fines or other penalties imposed by governmental authorities. In
addition, the Company may become subject to litigation or other claims filed
with state, federal or international authorities by franchisees or area
developers based on alleged unfair trade practices, implied covenants of good
faith and fair dealing or express violations of agreements. The Company believes
it is in material compliance with state, federal and international laws with
regard to its franchising activities, and that its relations with franchisees
and area developers is good. See "Business -- Government Regulation."
RELIANCE ON AREA DEVELOPERS
As of June 30, 1997, 505 of the 556 Precision Tune Auto Care centers, and 6
of the 21 fast-oil change and lube centers were in territories covered by area
development and international master license agreements. The Company relies, in
part, on the assistance of area developers to identify and recruit franchisees,
to assist in the development of a center, and to support franchisees' continuing
operations. Most area development agreements specify a schedule for opening
Precision Auto Care
8
<PAGE>
centers in the territory covered by the agreement. In the past, the Company has
agreed to extend or waive the development schedules for certain of its area
developers and there can be no assurance that area developers will be able to
meet their contractual development schedules. Although the Company also expects
to emphasize direct franchising in open areas in its future growth, the
development schedules of the Company's area developers will remain a substantial
part of the basis of the Company's expectations regarding the number and timing
of new center openings.
Specifically, the Company will be depending on its area developers to
promote the Precision Tune Auto Care, Precision Auto Wash and Precision Lube
Express franchises in their territories. Reluctance on their part to participate
in the development of these franchises and delays in Precision Auto Care center
openings could adversely effect the financial condition and results of
operations of the Company. The Company expects that it may encounter resistance
to introducing the Precision Lube Express brand and offering Precision Lube
Express franchises or opening Company-owned centers in areas covered by
Precision Tune Auto Care area subfranchisor agreements. While the Company is
confident that it is entitled to operate Company-owned centers and offer and
sell Precision Lube Express franchises directly or through others in such areas,
there can be no assurance that the Company will not become subject to legal
proceedings or otherwise expend Company resources in connection with disputes
concerning the Company's ability to offer and sell Precision Lube Express
franchises or open Company-owned centers in such areas. It also may be difficult
for the Company to enforce its area development agreements or to terminate the
rights of area developers who fail to meet development schedules or other
standards and requirements imposed by the Company, limiting the ability of the
Company to develop the territories of such developers. See "Business --
Operations."
AUTOMOTIVE TECHNOLOGY ADVANCES
The demand for the services offered by the Company's Precision Tune Auto
Care and Precision Lube Express centers could be adversely affected as
automotive technology improves and automobiles are designed to have longer
overall lifetimes and to require regularly scheduled service and maintenance at
less frequent intervals. For example, some automobile manufacturers now
recommend that consumers change oil at 10,000 mile intervals, an increase from
the mileage intervals currently recommended by most manufacturers. The demand
for the Company's services also could be adversely affected by longer and more
comprehensive warranty programs offered by automobile manufacturers.
LABOR AVAILABILITY
The provision of high quality maintenance services by Precision Tune Auto
Care centers requires an adequate supply of skilled labor. In addition, the
operating costs of such centers may be adversely affected by high turnover in
skilled technicians. Accordingly, a center's ability to increase productivity
and revenues could be affected by its inability to maintain the continued
employment of skilled technicians necessary to provide the center's required and
optional services. There can be no assurance that Precision Tune Auto Care or
its franchisees will be able to maintain an adequate skilled labor force
necessary to efficiently operate these centers or that labor expenses will not
increase as a result of a shortage in the supply of skilled technicians.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company's success depends to a significant extent on the performance
and continued services of senior management and certain key personnel with
experience in developing, financing and operating the various types of Precision
Auto Care centers and the Company's related franchising and manufacturing and
distribution activities. The Company has employment agreements with John F.
Ripley, President and Chief Executive Officer of the Company, James A. Hay,
Senior Vice President-Retail Operations, Arnold Janofsky, Senior Vice President
and General Counsel, Peter Kendrick, Senior Vice President and Chief Financial
Officer, Grant G. Nicolai, Senior Vice President Franchise Development, and
William R. Klumb, Vice President-Car Wash Operations. The loss of the services
of one or more of these key employees could have a material adverse impact on
the Company's financial condition and results of operations. Each of the
employment agreements contains certain noncompetition provisions that survive
the termination of employment in certain circumstances. The Company also has
obtained certain noncompetition agreements from several other members of
management and key personnel who are not subject to employment agreements.
However, there can be no assurance such noncompetition agreements will be
enforceable. See "Management" and "The Combination -- The Combination
Agreement."
SEASONAL NATURE OF PORTIONS OF THE BUSINESS
Seasonal changes may impact various sectors of the Company's business
differently and, accordingly, the Company's operations may be affected by
seasonal trends in certain periods. In particular, severe weather in winter
months can adversely
9
<PAGE>
affect the Company because such weather makes it difficult for consumers in
affected parts of the country to travel to Precision Tune Auto Care, Precision
Lube Express and Precision Auto Wash centers and obtain services. Severe winter
weather and rainy conditions also adversely impact the Company's sale and
installation of car wash equipment. Conversely, the Precision Auto Wash business
is favorably impacted by the normal winter weather conditions as demand for the
Company's car wash service increases substantially in winter months.
CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Following completion of the Offering, directors and executive officers of
the Company will beneficially own approximately 25.9% of the outstanding Common
Stock. Accordingly, these persons will have substantial influence over the
affairs of the Company, including the ability to influence the election of
directors, the outcome of votes by the Company's shareholders on major corporate
transactions, including mergers, sales of substantial assets, acquisitions and
going-private transactions, and other matters requiring shareholder approval.
See "Principal and Selling Shareholders."
BENEFITS TO MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Former owners of the Constituent Companies who are executive officers or
directors of the Company will receive an aggregate of approximately 1,145,236
shares of Common Stock as consideration in the Combination. In addition,
approximately $18.5 million of the net proceeds of the Offering will be used to
repay certain indebtedness of the Constituent Companies which is guaranteed by
executive officers or directors of the Company, or indebtedness for which such
persons are contingently liable. Certain former owners, including directors and
officers of the Company, are also entitled to purchase certain Precision Lube
Express buildings and Precision Auto Wash equipment at prices which are lower
than the prices the Company charges to third parties. See "Use of Proceeds" and
"Certain Transactions."
In addition to the consideration to be paid in the Combination, certain of
the owners of the Constituent Companies and executive officers and directors of
the Company have received options to purchase shares of Common Stock. See
"Management" and "Certain Transactions."
TRADEMARKS
The Company believes that its trademarks and other proprietary rights are
important to the success of its growth strategy. Accordingly, the Company
expects to continue to devote resources to the establishment and protection of
its trademarks in areas in which it conducts, or expects to conduct, business.
There can be no assurance that the actions taken by the Company to establish and
protect its trademarks and other proprietary rights will be adequate to prevent
imitation of its trademarks or to prevent others from seeking to block the
Company's use of its trademarks and proprietary rights as a violation of the
trademarks and proprietary rights of others. Moreover, no assurance can be given
that others will not assert rights in, or ownership of, trademarks and other
proprietary rights of the Company or that the Company will be able to
successfully resolve such conflicts.
In markets outside of the United States, the Company's rights to some or
all of its trademarks may not clearly be established. In addition, the laws of
certain foreign countries may not protect proprietary rights to the same extent
as do the laws of the United States. Although the Company has not in the past
suffered any material inhibition from doing business in desirable markets, there
can be no assurance that significant impediments will not arise in the future as
it expands product offerings and additional trademarks to new markets.
GOVERNMENT REGULATION
The Company is subject to federal, international and state laws and
regulations, including the regulations of the Federal Trade Commission as well
as similar authorities in individual states, in connection with the offer, sale
and termination of franchises, the operation of Precision Auto Care centers and
the regulation of the franchisor/franchisee relationship. The failure of the
Company to obtain or maintain approvals to sell franchises, or otherwise comply
with applicable franchise laws and regulations could have a material adverse
effect on the Company's financial condition and results of operations. Precision
Tune Auto Care and Precision Lube Express centers store new oil and handle large
quantities of used automotive oils and fluids. Precision Auto Wash centers
utilize chemicals in the washing process which are then discharged in the waste
water along with oils, fluids and other chemicals washed off of the vehicle. As
a result of these activities, the Company, its area developers and its
franchisees are subject to various environmental laws and regulations dealing
with the transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes, discharge of stormwater, and
10
<PAGE>
underground fuel storage tanks. The Company is not aware of any spills or
hazardous substance contamination on its properties or the properties of any
franchisees and believes that its operations are in material compliance with
existing environmental laws and regulations. However, if any such substances
were found on the Company's property or the property of any franchisee,
including leased properties, or if the Company were found to be in violation of
applicable laws and regulations, the Company could be responsible for clean-up
costs, property damage and fines or other penalties, any one of which could have
a material adverse effect on the Company's financial condition and results of
operations. See "Business -- Government Regulation."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws
and Virginia law may make a change in the control of the Company more difficult
to effect, even if a change in control were in the shareholders' interests. The
Virginia Stock Corporation Act prevents an "interested shareholder" (defined
generally as a person owning 10% or more of the Company's outstanding voting
stock) from engaging in an "affiliated transaction" with the Company for three
years following the date such person became an interested shareholder unless
certain conditions, including approval by the Company's Board of Directors, are
met. The Company's Articles of Incorporation allow the Board to determine the
terms of the preferred stock which may be issued by the Company without approval
of the holders of the Common Stock. The ability of the Company to issue
preferred stock in such manner could enable the Board to prevent changes in
management and control of the Company. The Board of the Company is divided into
three classes of directors, with directors being elected for staggered
three-year terms. Such staggered terms may affect the ability of the holders of
the Common Stock to change control of the Company. See "Description of Capital
Stock -- Anti-Takeover Provisions."
ABSENCE OF PRIOR PUBLIC MARKET; RELATIONSHIP OF OFFERING PRICE TO MARKET PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Company has applied for listing of the Common Stock on the
Nasdaq National Market, there can be no assurance that an active trading market
will develop or continue after the Offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined by
negotiations among the Company and representatives of the Underwriters, and may
not be indicative of the market price for shares of Common Stock after the
Offering. Prices for the shares of Common Stock after the Offering will be
determined in the market and may be influenced by many factors, including the
depth and liquidity of the market for the Common Stock, investor perception of
the Company, the automotive aftercare industry as a whole and general economic
and market conditions. See "Underwriting."
VOLATILITY OF MARKET PRICE FOR COMMON STOCK
From time to time after the Offering, there may be significant volatility
in the market price of the Common Stock. Quarterly operating results of the
Company or of other companies in the automotive aftercare market, changes in
earnings estimated by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance.
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and substantial dilution of $8.11 per share, the amount by which the purchase
price of the Common Stock offered hereby exceeds the pro forma net tangible book
value of the Common Stock immediately following the Offering. In the event the
Company issues additional Common Stock in the future, including shares which may
be issued in connection with future acquisitions or the exercise of outstanding
stock options, purchasers of Common Stock in this Offering may experience
further dilution in net tangible book value per share of the Common Stock. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 5,107,895 shares of Common
Stock outstanding. Of these shares, the 2,340,000 shares sold in the Offering
(together with any shares sold upon exercise of the over-allotment option) will
be freely tradeable without restriction, except for any shares purchased by an
"affiliate" of the Company within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"). The remaining 2,767,895 shares of Common Stock
were issued in the Combination and registered under the Securities Act.
Shareholders of the Constituent Companies who will own in excess
11
<PAGE>
of 3,000 shares of the Company's Common Stock following the consummation of the
Combination have agreed pursuant to the Combination Agreement not to sell or
dispose of their shares for a period of 180 days following closing without the
Company's prior consent. The Company has agreed it will not permit such
shareholders to sell their shares without the prior consent of the
representatives of the underwriters. Otherwise, such shares will be freely
tradable without restriction except for shares acquired by "affiliates" of the
Constituent Companies which will be subject to the restrictions on transfer
provided in Rule 145 of the Securities Act. In addition, the Company and each of
its directors and officers have agreed, for a period of 180 days from the date
of this Prospectus, not to sell or otherwise dispose, directly or indirectly, of
any shares of Common Stock in the public market, without the prior written
consent of the Underwriters. Commencing 180 days after the completion of the
Offering, all of the issued and outstanding shares of Common Stock except
1,574,052 shares held by affiliates of the Constituent Companies will be
eligible for sale in the public market, and an additional 658,100 shares will be
available for issuance upon the exercise of outstanding stock options. The
market price of the Common Stock could be materially and adversely affected by
the sale or availability for sale of shares now held by the existing
shareholders of the Company or of shares which may be issued under the Company's
stock incentive plan.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,300,000 shares of
Common Stock offered by the Company, at an assumed public offering price of
$11.00 per share, are estimated to be approximately $22.0 million ($25.6 million
if the Underwriters' over-allotment option is exercised in full), after
deducting underwriting discounts and commissions and estimated offering expenses
and estimated offering expenses of the Selling Shareholders payable by the
Company.
In connection with the Combination, the Company plans to use approximately
$18.5 million of the net proceeds of the Offering to repay certain indebtedness
of the Constituent Companies assumed pursuant to the Combination. At June 30,
1997, such indebtedness had interest rates ranging between 7.5% and 12.5% and
had a weighted average interest rate of 9.3%. Such indebtedness, if not prepaid,
would otherwise mature at various dates through February 2026. See "The
Combination" and "Certain Transactions."
The Company intends to spend approximately $2.5 million to upgrade and
equip each center in the Precision Tune Auto Care system with current signage
and a "point of sale" computer system, which will communicate sales results and
other data to the Company's corporate office. Following the Combination, the
Company will make an investment to ensure that each existing center is equipped
with the Company's proprietary point of sale system. For those centers which do
not currently have the system, the Company will provide the system (which costs
approximately $2,500) directly to the franchisee. For those centers which
already have the system, the Company will reimburse the franchisee for up to
$2,500 of costs the franchisee incurred in installing the system. In addition,
the Company will invest up to $2,500 to upgrade each center's signage to current
image standards. $2.0 million of the net proceeds from the Offering will be used
for this purpose and the balance will be financed through borrowings under a
revolving credit facility.
The Company recently entered into a letter of understanding to purchase all
of the outstanding capital shares of Worldwide Drying Systems, Inc.
("Worldwide") for $2.7 million. Worldwide manufactures and distributes drying
systems for installation in automatic car washes. The terms of the agreement
call for a cash payment at closing of $1.5 million and seller financing of $1.2
million. The promissory note will bear interest at a rate of 9% per annum and
require monthly payments of principal and interest over a four-year term. The
Company expects to close the transaction immediately following the consummation
of the Offering and the Combination. The Company intends to use $1.5 million of
the net proceeds of the Offering to pay the cash portion of the purchase price.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, investment grade or
government, interest-bearing securities. The Company will not receive any
proceeds from the sale of shares of Common Stock offered by the Selling
Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
As a newly formed corporation, the Company has never declared or paid
dividends on its Common Stock. The Company expects that future earnings, if any,
will be retained to finance the growth and development of the Company's business
and, accordingly, does not intend to declare or pay any dividends on the Common
Stock for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon the future earnings, results of operations,
financial condition and capital requirements of the Company, among other
factors. The Company expects that the terms of its revolving credit facility
will prohibit the Company from
12
<PAGE>
paying dividends while amounts are outstanding under the revolving credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of June 30, 1997 on a pro forma basis to reflect the Combination and on a pro
forma as adjusted to give effect to the Combination and the sale of the
2,300,000 shares of Common Stock offered by the Company in the Offering and the
application of the net proceeds therefrom, which are estimated to be
approximately $22.0 million based on an assumed initial offering price of $11.00
per share. The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Unaudited Pro Forma Combined Financial Statements of the Company included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------
<S> <C> <C>
PRO FORMA
COMBINED
AS ADJUSTED(1)
PRO FORMA FOR THE
COMBINED OFFERING
--------- ----------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Short-term debt, including current portion of long-term debt and notes payable to
related parties....................................................................... $11,417 $ 261
--------- ----------------
--------- ----------------
Long-term debt less current portion..................................................... $10,908 $ 4,764
Shareholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized, no shares
outstanding........................................................................ -- --
Common Stock, $.01 par value; 19,000,000 shares authorized; 2,807,895 shares issued
and outstanding, pro forma combined; 5,107,895 shares issued and outstanding, pro
forma as adjusted (2).............................................................. 28 51
Additional paid-in capital............................................................ 26,709 48,716
--------- ----------------
Total shareholders' equity......................................................... 26,737 48,767
--------- ----------------
Total capitalization............................................................... $37,645 $ 53,531
--------- ----------------
--------- ----------------
</TABLE>
- ---------------
(1) Does not include 670,100 shares of Common Stock issuable upon the exercise
of stock options granted under the Company's stock option plans (177,000 of
which are expected to be granted effective at the closing of the Offering)
or 351,000 shares of Common Stock that may be issued pursuant to the
Underwriters' over-allotment option. See "Management -- Compensation
Pursuant to Plans" and "Underwriting."
(2) Share data includes 27,200 shares issued upon exercise of common stock
warrants simultaneously with the Offering.
DILUTION
At June 30, 1997, after giving effect to the Combination, the unaudited pro
forma combined net tangible book deficit of the Company was $(5.6 million), or
$(2.01) per share. Pro forma combined net tangible book deficit is the tangible
net worth (tangible assets less total liabilities) of the Combined Constituent
Companies immediately following the Combination and prior to the Offering. After
giving effect to the Combination and the sale by the Company of the 2,300,000
shares of Common Stock offered by the Company at an assumed initial offering
price of $11.00 per share, the pro forma combined net tangible book value of the
Company would have been $14.7 million or $2.89 per share. This represents an
immediate increase in pro forma net tangible book value of $4.90 per share to
existing shareholders and an immediate dilution in pro forma net tangible book
value of $8.11 per share to new investors purchasing the shares of Common Stock
in the Offering. The following table illustrates this per share dilution:
13
<PAGE>
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................................................... $ 11.00
Pro forma net tangible book deficit prior to the Offering(1)............................. $(2.01)
Increase attributable to new investors................................................... 4.94
------
Pro forma net tangible book value after the Offering....................................... 2.89
-------
Pro forma dilution in net tangible book value to New Investors............................. $ 8.11
-------
-------
</TABLE>
The following table sets forth at June 30, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration to the Company
and the average price per share paid to the Company by existing shareholders
after giving effect to the Combination and by the new investors purchasing
shares of Common Stock in the Offering:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
-------------------- ------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)(2)......................................... 2,807,895 55.0% $ 11,490 31.2% $ 4.09
New investors....................................................... 2,300,000 45.0% 25,300 68.0% $ 11.00
---------- ------- -------- -------
Total.......................................................... 5,107,895 100.0% $ 36,790 100.0%
---------- ------- -------- -------
---------- ------- -------- -------
</TABLE>
- ---------------
(1) This calculation is based on the 2,780,695 shares of Common Stock to be
issued in the Combination, and 27,200 shares issued upon exercise of common
stock warrants simultaneously with the Offering.
(2) Total consideration for the existing shareholders represents the net cash
investment made by the owners of the Constituent Companies prior to the
Combination plus the warrant exercise price of warrants exercised
simultaneously with the Offering.
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or any of the Company's other outstanding options or warrants. Upon the
closing of the Combination, there will be outstanding options and warrants to
purchase 670,100 shares of Common Stock at a weighted average exercise price of
$9.34 per share (177,000 of which are expected to be issued at the closing of
the Offering with an exercise price equal to the initial offering price). To the
extent that any of the outstanding options are exercised, there will be further
dilution to new investors. See "Shares Eligible for Future Sale."
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
combination of Precision Auto Care and the Constituent Companies as more fully
described herein. See "The Combination." The unaudited pro forma financial
statements have been prepared by the Company based on the historical financial
statements of WE JAC, which is deemed the acquirer of the remaining Constituent
Companies in this Prospectus for financial statement purposes, adjusted to
reflect the purchase (as defined by Accounting Principle Board Opinion No. 16)
of the remaining Constituent Companies. The unaudited pro forma combined
financial statements reflect purchase adjustments based upon certain preliminary
estimates and assumptions deemed appropriate by management of the Company, but
do not include any expected benefits or cost reductions, if any, anticipated by
the Constituent Companies following consummation of the Combination. The
unaudited pro forma combined balance sheets at June 30, 1997, give effect to (i)
the consummation of the Combination, (ii) the consummation of the Combination
and this Offering and (iii) the consummation of the Combination, this Offering
and the acquisition of the assets of Worldwide Drying Systems, Inc., as if such
transactions had occurred on such date. The unaudited pro forma statements of
operations for the year ended June 30, 1997 give effect to (i) the Combination,
(ii) the Combination and the Offering and (iii) the Combination, the Offering
and the acquisition of Worldwide Drying Systems, Inc. as if such transactions
were completed on July 1, 1996. All companies except WE JAC have historically
reported earnings on a December 31 year end. However, the pro forma financial
results for all companies have been presented using results of operations for
the twelve month period ended June 30, 1997.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of WE JAC and the individual
Constituent Companies comprising the Ohio Group, including the notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Prospectus.
14
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
OTHER PURCHASE COMBINED
WE JAC CONSTITUENT ACCOUNTING AS ADJUSTED
HISTORICAL COMPANIES AND COMBINING PRO FORMA FOR
(AUDITED) HISTORICAL(1) ADJUSTMENTS COMBINED(2) OFFERING(3)
---------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Current assets....................... $ 7,811 $ 4,036 $ (188)(5) $11,659 $13,189
Property plant and equipment......... 854 12,325 (586)(6) 12,593 14,593
Goodwill and other intangibles....... 16,579 1,554 14,202(7)(8) 32,335(7) 32,335(7)
Other................................ 1,450 639 2,089 2,089
---------- ------------- ------------- ----------- -----------
Total assets......................... $ 26,694 $18,554 $13,428 $58,676 $62,206
---------- ------------- ------------- ----------- -----------
---------- ------------- ------------- ----------- -----------
Current liabilities.................. $ 15,053 $ 4,519 $ -- $19,572 $ 8,155
Long term debt....................... 622 10,286 -- 10,908 3,825
Other................................ 725 259 475(8) 1,459(9) 1,459(9)
---------- ------------- ------------- ----------- -----------
Total liabilities.................... 16,400 15,064 475 31,939 13,439
Stockholders' equity................. 10,294 3,490 12,953(7)(8)(10) 26,737(7)(8)(10) 48,767(7)(8)(10)
---------- ------------- ------------- ----------- -----------
Total liabilities and stockholders'
equity............................. $ 26,694 $18,554 $13,428 $58,676 $62,206
---------- ------------- ------------- ----------- -----------
---------- ------------- ------------- ----------- -----------
<CAPTION>
PRO FORMA
COMBINED
AS ADJUSTED
FOR OFFERING
AND
ACQUISITION(4)
--------------
<S> <C>
Current assets....................... $ 11,689
Property plant and equipment......... 15,543
Goodwill and other intangibles....... 34,085(7)
Other................................ 2,089
--------------
Total assets......................... $ 63,406
--------------
--------------
Current liabilities.................. $ 8,416
Long term debt....................... 4,764
Other................................ 1,459(9)
--------------
Total liabilities.................... 14,639
Stockholders' equity................. 48,767(7)(8)(10)
--------------
Total liabilities and stockholders'
equity............................. $ 63,406
--------------
--------------
</TABLE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997(11)
<TABLE>
<CAPTION>
PRO FORMA
OTHER PURCHASE COMBINED
WE JAC CONSTITUENT ACCOUNTING AS ADJUSTED
HISTORICAL COMPANIES AND COMBINING PRO FORMA FOR
(AUDITED) HISTORICAL(1) ADJUSTMENTS COMBINED(2) OFFERING(3)
---------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.............................. $ 27,457 $13,956 $ (215)(12) $41,198 $41,198
Direct cost.......................... 20,291 10,850 (207)(12) 30,934 30,934
---------- ------------- ------------- ----------- -----------
Contribution......................... 7,166 3,106 (8) 10,264 10,264
General and administrative
expenses............................. (2,522) (2,041) (41) (4,604) (4,604)
Amortization expense................. (968) -- (516)(13) (1,484)(13) (1,484)(13)
Company owned stores held for
resale............................... 29 -- -- 29 29
---------- ------------- ------------- ----------- -----------
Operating income..................... 3,705 1,065 (565) 4,205 4,205
Other income (expense)............... (1,179) (1,103) (26)(12) (2,308) (359)(15)
---------- ------------- ------------- ----------- -----------
Income (loss) before income taxes.... 2,526 (38) (591) 1,897 3,846
Provision for income taxes........... 1,271 (18) (26) 1,227(17) 1,987(17)
---------- ------------- ------------- ----------- -----------
Net income (loss).................... $ 1,255 $ (20) $ (565) $ 670 $ 1,859
---------- ------------- ------------- ----------- -----------
---------- ------------- ------------- ----------- -----------
Earnings per share................... $ 0.23(18) $ 0.36(18)
----------- -----------
----------- -----------
<CAPTION>
PRO FORMA
COMBINED
AS ADJUSTED
FOR OFFERING
AND
ACQUISITION(4)
--------------
<S> <C>
Revenue.............................. $ 43,107
Direct cost.......................... 32,021
--------------
Contribution......................... 11,086
General and administrative
expenses............................. (4,927)
Amortization expense................. (1,542)(14)
Company owned stores held for
resale............................... 29
--------------
Operating income..................... 4,646
Other income (expense)............... (456)(16)
--------------
Income (loss) before income taxes.... 4,190
Provision for income taxes........... 2,144(17)
--------------
Net income (loss).................... $ 2,046
--------------
--------------
Earnings per share................... $ 0.39(18)
--------------
--------------
</TABLE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT ADJUSTMENTS
(1) Reflects the historical financial data for the Ohio Group and All Other
Constituent Companies as of and for the twelve months ended June 30, 1997.
See note (19) for individual Company detail.
(2) As adjusted to reflect 2,780,695 shares issued in the Combination.
15
<PAGE>
(3) As adjusted to reflect the sale of 2,300,000 shares by the Company to the
public at an assumed initial offering price of $11.00 per share; payments
of $18.5 million of outstanding debt, and a $2.0 million upgrade to
existing Precision Tune Auto Care company centers with proceeds from the
Offering as described in "Use of Proceeds."
(4) As adjusted to reflect the proceeds and use of proceeds from the Offering
as described in footnote (3), and the $2.7 million purchase of the capital
stock of Worldwide as if such transactions had occurred on June 30, 1997.
The purchase was financed by $1.5 million in proceeds from the Offering,
and $1.2 million of seller financing, ($261,000 of which is classified as
current) as described in "Use of Proceeds."
(5) Reflects the elimination of $188,000 in intercompany receivables.
(6) Reflects the distribution of certain fixed assets with a net book value of
$586,000 in the Combination.
(7) The accounting for the Combination and the acquisition of Worldwide is
summarized as follows. Management believes that the final allocation of the
purchase price will not materially differ from the preliminary estimated
amounts.
<TABLE>
<CAPTION>
COMBINATION ACQUISITION
----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
WE JAC shares.................................................... 1,333,625
Other Constituent Companies shares............................... 1,447,070 at $11 per share $15,918
----------
Total shares issued.............................................. 2,780,695
----------
----------
Cash consideration.................................................................................... $ 1,500
Seller financing...................................................................................... 1,200
Transactions costs.................................................................................... 525
----------- -----------
Total purchase price.................................................................................. $16,443 $ 2,700
----------- -----------
----------- -----------
<CAPTION>
COMBINATION ACQUISITION
----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fair value of net tangible assets acquired............................................................ $ 2,716 $ 950
Amounts allocated to franchise rights and goodwill.................................................... 14,002 1,750
Amounts allocated to other intangibles................................................................ 200
Other accrued costs................................................................................... (475)
----------- -----------
----------- -----------
Total purchase price.................................................................................. $16,443 $ 2,700
----------- -----------
----------- -----------
</TABLE>
(8) The Company has allocated $525,000 of the total transaction expenses to be
paid out of the proceeds of the Offering, to costs of the Combination. An
additional $475,000 has been accrued for estimated costs expected to be
incurred.
(9) Reflects the resulting deferred tax liability of the Constituent Companies
which, other than WE JAC, were previously organized as Subchapter S
corporations, partnerships or limited liability companies.
(10) Reflects the elimination of retained earnings or accumulated deficit.
(11) Reflects results of operations for the twelve months ended June 30, 1997,
although historical year end is December 31.
(12) Reflects the elimination of intercompany transactions between Rocky
Mountain I, Rocky Mountain II and Ralston Car Wash, and between Miracle
Industries, Lube Ventures and Prema Properties including the elimination of
$127,000 in management fees.
(13) Reflects additional straight line amortization of goodwill over 30 years
and other intangibles over 4 years ($516,000 for the year ended June 30,
1997).
(14) Reflects additional straight line amortization of goodwill over 30 years
including $1.8 million related to the purchase of the capital stock of
Worldwide and other intangibles over 4 years ($574,000 for the year ended
June 30, 1997).
(15) Reflects the reduction in interest expense ($2.0 million for the year ended
June 30, 1997) on debt to be repaid with proceeds of the Offering.
(16) Reflects the net effect of the reduction in interest expense ($1.9 million
for the year ended June 30, 1997) on debt to be repaid with the proceeds of
the Offering and the increase in interest expense on seller financing to be
incurred to purchase Worldwide.
(17) Reflects a provision for income taxes on the combined pro forma earnings at
the effective rate of 39%, after considering non-deductible goodwill
amortization.
(18) The weighted average shares outstanding used to calculate pro forma
combined earnings per share is based on the number of shares of common
stock and common stock equivalents of the Company issued in the
Combination, as if such shares had been outstanding for all periods
presented, and is comprised of the following: 2,780,695 shares to be issued
in connection with the Combination, 27,200 shares issued upon exercise of
common stock warrants simultaneously with the Offering, and 114,014 shares
outstanding using the treasury stock method on options and warrants. The
weighted average shares outstanding used to calculate pro forma combined as
adjusted for offering and acquisition earnings per share also include
2,300,000 shares to be issued by the Company in the Offering.
(19) Details of the historical Ohio Group and All Other Constituent Companies
follow.
16
<PAGE>
THE OHIO GROUP AND ALL OTHER CONSTITUENT COMPANIES
UNAUDITED PRO FORMA BALANCE SHEETS
JUNE 30, 1997
<TABLE>
<CAPTION>
THE OHIO GROUP ALL OTHER CONSTITUENT COMPANIES
-------------------------------- -------------------------------------------
MIRACLE LUBE PREMA ROCKY ROCKY RALSTON MIRACLE
INDUSTRIES VENTURES PROPERTIES MOUNTAIN I MOUNTAIN II CAR WASH PARTNERS
---------- -------- ---------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets............................... $2,572 $ 944 $ 44 $225 $ 187 $ 9 $ 55
Property plant and equipment................. 3,746 860 3,032 467 2,282 201 1,737
Goodwill and other intangible assets......... 1,495 59 -- -- -- -- --
Other........................................ 545 6 68 10 10 -- --
---------- -------- ---------- ---------- ----------- -------- --------
Total assets................................. $8,358 $1,869 $3,144 $702 $ 2,479 $210 $1,792
---------- -------- ---------- ---------- ----------- -------- --------
---------- -------- ---------- ---------- ----------- -------- --------
Current liabilities.......................... $2,426 $ 604 $ 872 $ 34 $ 325 $ 81 $ 177
Long term debt............................... 3,809 946 2,079 461 1,545 218 1,228
Other........................................ 154 -- 105 -- -- -- --
---------- -------- ---------- ---------- ----------- -------- --------
Total liabilities............................ 6,389 1,550 3,056 495 1,870 299 1,405
Stockholders' equity......................... 1,969 319 88 207 609 (89) 387
---------- -------- ---------- ---------- ----------- -------- --------
Total liabilities and stockholders' equity... $8,358 $1,869 $3,144 $702 $ 2,479 $210 $1,792
---------- -------- ---------- ---------- ----------- -------- --------
---------- -------- ---------- ---------- ----------- -------- --------
<CAPTION>
HISTORICAL
COMBINED
--------
<S> <C>
Current assets............................... $ 4,036
Property plant and equipment................. 12,325
Goodwill and other intangible assets......... 1,554
Other........................................ 639
--------
Total assets................................. $18,554
--------
--------
Current liabilities.......................... $ 4,519
Long term debt............................... 10,286
Other........................................ 259
--------
Total liabilities............................ 15,064
Stockholders' equity......................... 3,490
--------
Total liabilities and stockholders' equity... $18,554
--------
--------
</TABLE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997(F)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THE OHIO GROUP ALL OTHER CONSTITUENT COMPANIES
-------------------------------- -------------------------------------------
MIRACLE LUBE PREMA ROCKY ROCKY RALSTON MIRACLE HISTORICAL
INDUSTRIES VENTURES PROPERTIES MOUNTAIN I MOUNTAIN II CAR WASH PARTNERS COMBINED
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Revenue................................ $8,800 $2,201 $ 750 $216 $ 1,404 $169 $416 $ 13,956
Cost of sales.......................... 7,486 1,622 558 110 855 96 123 10,850
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Gross profit......................... 1,314 579 192 106 549 73 293 3,106
Selling, general and admin............. 1,119 265 45 36 307 38 231 2,041
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Operating income....................... 195 314 147 70 242 35 62 1,065
Other expense.......................... (426) (93) (273) (29) (178) (37) (67) (1,103)
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Income before income taxes............. (231) 221 (126) 41 64 (2) (5) (38)
Provision for income taxes............. (90) 86 (49) 15 23 (1) (2) (18)
---------- -------- ---------- ---------- ----------- -------- -------- ------------
Net income (loss)...................... $ (141) $ 135 $ (77) $ 26 $ 41 $ (1) $ (3) $ (20)
---------- -------- ---------- ---------- ----------- -------- -------- ------------
---------- -------- ---------- ---------- ----------- -------- -------- ------------
</TABLE>
17
<PAGE>
SELECTED FINANCIAL DATA
Simultaneous with, and as a condition to, the closing of the Offering the
Company will acquire all of the Constituent Companies in a series of mergers and
share exchanges. The presentation of the financial information of the Company in
the future will reflect WE JAC as the acquiror of the other Constituent
Companies due to the ownership interest in the Company WE JAC shareholders will
receive and the composition of the Company's board of directors and managers
immediately following the Combination. The Combination will be accounted for
using the historical cost basis of WE JAC, and the fair value of the other
Constituent Companies, as determined in accordance with Accounting Principles
Board Opinion No. 16. Miracle Industries, Lube Ventures and Prema Properties
have been combined and are referred to as the "Ohio Group" for purposes of
presenting the Selected Financial Data below and the Management's Discussion and
Analysis of Financial Condition and Results of Operations portion of this
Prospectus. The Ohio Group has been presented in this format because Miracle
Industries, Lube Ventures and Prema Properties are under common ownership,
control and management. Rocky Mountain I, Rocky Mountain II, Ralston Car Wash
and Miracle Partners have been combined and presented as "All Other Constituent
Companies" for purposes of presenting the Selected Financial Data below and
Management's Discussion and Analysis of Financial Condition and Results of
Operations because prior to the Combination each of these Constituent Companies
has been operating independently from WE JAC and the Company believes that the
combination of related entities within that group would not be material to an
investor's understanding of the Combination.
WE JAC
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein. The consolidated statement of operations data set
forth below with respect to the years ended June 30, 1995, 1996 and 1997 and the
balance sheet data as of June 30, 1996 and 1997, is derived from the audited
consolidated financial statements of WE JAC included elsewhere in this
Prospectus. The statement of operations data set forth below with respect to the
years ended April 30, 1993 and June 30, 1994 and the balance sheet data as of
April 30, 1993 and June 30, 1994 are derived from audited consolidated financial
statements not included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEARS ENDED JUNE 30,
APRIL 30, -----------------------------------------------
1993(1) 1994(1) 1995 1996 1997
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue....................................................... $ 24,323 $ 24,814 $ 26,579 $ 26,734 $ 27,457
Direct cost................................................... 17,688 18,224 20,042 19,708 20,291
---------- -------- -------- -------- --------
Contribution.................................................. 6,635 6,590 6,537 7,026 7,166
General and administrative expenses........................... 2,640 2,388 2,888 2,276 2,522
Amortization expense.......................................... 1,056 975 1,015 964 968
Company owned stores held for resale (loss)................... (173) (171) (351) (455) 29
---------- -------- -------- -------- --------
Operating income.............................................. 2,766 3,056 2,283 3,331 3,705
Other expense................................................. (1,361) (1,431) (2,435) (1,083) (1,179)
---------- -------- -------- -------- --------
Income (loss) before taxes.................................... 1,405 1,625 (152) 2,248 2,526
Provision for income taxes.................................... 23 868 72 1,178 1,271
Extraordinary gain............................................ -- -- 157 -- --
---------- -------- -------- -------- --------
Net income (loss)............................................. $ 1,382 $ 757 $ (67) $ 1,070 $ 1,255
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
<CAPTION>
SYSTEM STATISTICS: (IN THOUSANDS, EXCEPT NUMBER OF CENTERS)
<S> <C> <C> <C> <C> <C>
System wide retail sales(2)................................... $160,434 $172,028 $189,568 $196,549 $207,777
Number of centers opened during period........................ 43 45 51 76 62
Number of centers closed during period........................ 28 120 16 46 39
Number of centers in operation at end of period............... 556 481 516 546 569(4)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
APRIL 30, ----------------------------------------
1993 1994 1995 1996 1997
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit).................................................. $ 1,994 $ 1,599 $ (940) $ 180 $(7,242)(3)
Total assets............................................................... 24,725 25,325 24,810 25,654 26,694
Total debt(3).............................................................. 10,433 9,011 8,633 8,462 9,379
Shareholders' equity....................................................... 9,837 9,260 9,193 11,406 10,294
</TABLE>
- ---------------
(1) In February 1996, WE JAC's Board of Directors approved a change in the
Company's fiscal year end from April 30 to June 30. Results of operations
for May 1993 and June 1993 were not materially different from annualized
results.
(2) System wide retail sales are not included in the financial statements of WE
JAC. They are, however, the basis for royalty payments to WE JAC and are
based on reports provided to WE JAC by franchisees. The Company intends to
use a portion of the net cash proceeds from the Offering to upgrade its
existing point of sale system to provide more timely data from franchisees.
Currently, sales data is manually calculated and reported and as such there
is often a lag time before that data is received in the Company's offices
for reporting purposes. Accordingly, the information presented for the
fiscal year ended June 30, 1997 contains sales estimates for franchisees who
have not yet reported sales to the Company for portions of that period.
(3) The line of credit and term loan of $8.6 million for WE JAC mature in its
fiscal year ended June 30, 1998 and, accordingly, are included as current
liabilities. It is anticipated that all of this debt will be paid off with
proceeds from this Offering.
(4) Includes 13 centers temporarily closed for relocation.
THE OHIO GROUP
The following selected combined financial data should be read in
conjunction with the financial statements and the notes thereto of the entities
comprising the Ohio Group included elsewhere herein. The combined statement of
operations data set forth below with respect to the year ended December 31, 1996
and the balance sheet data as of December 31, 1996 is derived from the
individual audited financial statements of the entities comprising the Ohio
Group included elsewhere in this Prospectus. The combined statement of
operations data set forth below with respect to the year ended December 31, 1995
and the combined balance sheet data as of December 31, 1995 is derived from the
individual audited financial statements of Miracle Industries and the individual
unaudited financial statements of Lube Ventures and Prema Properties included
elsewhere in this Prospectus. The combined statement of operations data set
forth below with respect to the six month periods ended June 30, 1996 and 1997
and the balance sheet data as of June 30, 1997 are derived from the individual
unaudited financial statements of the entities comprising the Ohio Group
included elsewhere in this Prospectus. The combined statement of operations set
forth below with respect to the year ended December 31, 1994 and the balance
sheet data as of December 31, 1994 are derived from unaudited individual
financial statements of the entities comprising the Ohio Group not included in
this Prospectus. The unaudited combined financial statements include all normal
recurring adjustments that the entities comprising the Ohio Group consider
necessary for a fair presentation of their financial position and results of
operations. The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
full year ended December 31, 1997, or any other future period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996(2) 1997
------------ ------------ ------------ ------------ ------------
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................................... $3,148 $4,888 $ 11,793 $ 4,492 $ 4,450
Direct cost...................................... 2,134 4,120 9,552 3,723 3,883
------------ ------------ ------------ ------------ ------------
Contribution..................................... 1,014 768 2,241 769 567
General and administrative expenses.............. 780 782 1,505 744 722
------------ ------------ ------------ ------------ ------------
Operating income (loss).......................... 234 (14) 736 25 (155)
Other expense.................................... (172) (338) (650) (310) (413)
------------ ------------ ------------ ------------ ------------
Net Income (loss)(1)............................. $ 62 $ (352) $ 86 $ (285) $ (568)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Working capital (deficit)........................ $ 229 $ 594 $ (515)(3) $ (417)(3)
Total assets..................................... 6,591 7,262 13,405 13,359
Total debt....................................... 3,548 3,969 8,362 9,321
Shareholder's equity............................. 2,690 2,763 2,854 2,420
</TABLE>
- ---------------
(1) The Ohio Group consists of legal entities that are taxed as partnerships and
therefore no income tax expense is included.
(2) Results for the six months ended June 30, 1996 reflect the acquisition of a
90% interest in HydroSpray by Miracle Industries effective March 1, 1996.
The amounts presented do not include results of operations for January and
February 1996. HydroSpray has historically generated negative contribution
and losses from operations during those months due to seasonal factors. If
these months had been included, combined income for the Ohio Group would
have been reduced by $95,000, for the year ended December 31, 1996.
(3) In November 1996, Miracle Industries acquired a 50% investment in Indy
Ventures with proceeds from a short term credit facility.
ALL OTHER CONSTITUENT COMPANIES
The combined statement of operations data set forth below with respect to
the year ended December 31, 1996 and the balance sheet data as of December 31,
1996 are derived from the individual audited financial statements of the
entities comprising All Other Constituent Companies not included in this
Prospectus. The combined statement of operations data set forth below with
respect to the year ended December 31, 1995 and for the six months ended June
30, 1996 and 1997 and the combined balance sheet data as of June 30, 1997 are
derived from the individual unaudited financial statements the entities
comprising All Other Constituent Companies not included in this Prospectus. The
combined statement of operations data set forth below with respect to the year
ended December 31, 1995 and the combined balance sheet data as of December 31,
1994 are derived from the individual unaudited financial of the entities
comprising All Other Constituent Companies not included in this Prospectus. Such
unaudited financial statements include all normal recurring adjustments that the
Other Constituent Companies consider necessary for a fair presentation of their
financial position and results of operations. The results of operations for the
six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the full year ended December 31, 1997, or any other
future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
------ ------ ------------ ------ ------
<CAPTION>
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.............................................................. $2,017 $2,070 $2,175 $1,185 $1,197
Direct cost.......................................................... 893 1,131 1,158 580 605
------ ------ ------------ ------ ------
Contribution......................................................... 1,124 939 1,017 605 592
General and administrative expenses.................................. 764 600 611 360 362
------ ------ ------------ ------ ------
Operating income..................................................... 360 339 406 245 230
Other expense........................................................ (348) (256) (218) (146) (111)
------ ------ ------------ ------ ------
Net Income(1)........................................................ $ 12 $ 83 $ 188 $ 99 $ 119
------ ------ ------------ ------ ------
------ ------ ------------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------- --------
1994 1995 1996 1997
------- ------ ------------ --------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Working deficit...................................................... $(2,687) $ (380) $ (679) $ (140)
Total assets......................................................... 5,027 5,256 5,130 5,183
Total debt........................................................... 3,875 3,998 3,855 3,781
Shareholder's equity................................................. 946 822 996 1,115
</TABLE>
- ---------------
(1) Each of the All Other Constituent Companies are legal entities that are
taxed as partnerships and therefore no income tax expense is included.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Prospectus contain, in addition to historical
information, forward-looking statements which involve risks and uncertainties.
The Company's actual results could differ significantly from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors."
OVERVIEW
Contemporaneously with the closing of the Offering, the Company will
acquire the Constituent Companies in a series of mergers and share exchanges.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented in four components. The first component is the Pro Forma
Combined Financial Results for the year ended June 30, 1997, which include the
accounts of the Constituent Companies as if the Combination had occurred on July
1, 1996. The next three components of Management's Discussion and Analysis of
Financial Condition and Results of Operations are the financial results for WE
JAC, the Ohio Group, and All Other Constituent Companies. The Ohio Group
consists of Miracle Industries, Lube Ventures and Prema Properties. Financial
results for these entities are combined because the companies are under common
ownership and control. All Other Constituent Companies consist of Miracle
Partners, Rocky Mountain I, Rocky Mountain II and Ralston Car Wash. Prior to the
Combination, each of these companies has been operating separately and
independently from WE JAC and the Ohio Group. The results of KBG, LLC are not
included because that Constituent Company was formed for the purpose of
conveying certain proprietary software and intellectual property and has never
conducted any operations.
Although all but the largest Constituent Company report financial results
on a calendar year basis, the resulting combined Company will report on a June
30 fiscal year end and, as a result, historical information appearing in this
Prospectus relating to all but the largest Constituent Company may not be
comparable to future results of the combined entity.
PRO FORMA COMBINED COMPANY
GENERAL
Company revenues are derived from four primary areas: franchising,
company-operated center retail operations, manufacturing, and the distribution
of parts and supplies. Franchise revenue is derived from royalties paid by
individual franchisees to the Company, as well as the sale of individual
franchises and franchise development rights. Retail operations revenue is
derived from the operation of company-owned automotive centers and car wash
facilities. Manufacturing revenues are composed of the sale and installation of
car wash equipment and fast oil change and lubrication buildings. Parts and
supply revenue is derived from the sale of automotive parts and equipment and
car wash parts, supplies and chemicals. Direct costs consist of the cost of
parts and equipment, fees paid to area developers for the sale of new franchises
and for supporting franchisees, corporate costs associated with directly
supporting the franchise system, and the cost of operating Company-owned car
washes and fast oil change and lube centers. General and administrative expenses
include all legal, accounting, general overhead, information technology and
corporate staff expenses. Other income and expense items consist of
amortization, interest income and expense and the operating results of centers
held for resale by the Company.
The Company believes that on an individual basis, the Constituent Companies
have not had the resources required to more fully penetrate the automotive
aftermarket. The resulting combined Company strategy is to leverage name
recognition and existing market position by providing multiple complementary
lines of business with additional manufacturing and distribution capabilities.
As a result of the Combination, the Company believes there are several
areas where economies of scale can be achieved. Such areas include employee
benefits, advertising, insurance and parts and supplies purchasing arrangements.
The Company believes that its combined infrastructure will more efficiently
support the Company's operations. The Company cannot presently predict the
effect, if any, on its financial performance from any of these or other similar
opportunities to improve the operations of the Constituent Companies. The
Constituent Companies have been managed throughout the periods presented as
independent, privately owned companies and, as such, their results of operations
reflect different tax structures which have influenced, among other things,
their historical levels of owners' compensation.
Miracle Industries, Lube Ventures, Miracle Partners, Rocky Mountain I, and
Rocky Mountain II are corporations which historically have elected to be subject
to subchapter S of the Internal Revenue Code of 1986, as amended. Prema
Properties and Ralston Car Wash are limited liability companies and are taxed as
partnerships. Upon consummation of the Combination,
21
<PAGE>
the Company will file as a consolidated group for federal income tax purposes.
For purposes of the Pro Forma Combined Financial Statements presented in this
Prospectus, federal and state income taxes have been provided for these
companies, as if they had been taxable as C corporations during the periods.
The historical results of operations of the Constituent Companies have also
been adjusted to reflect certain purchase accounting adjustments, including (i)
the amortization of goodwill arising from the Combination and (ii) the
elimination of management fees charged between certain Constituent Companies.
Accordingly, the Combination results in additional goodwill of $13.2 million for
a total of $29.8 million of goodwill on the combined Company's balance sheet. As
a result, the Company will incur a non-cash and non-tax deductible expense of
approximately $1.0 million per year for the amortization of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the operations and growth of the Constituent Companies have
been financed through private equity capital, internally generated working
capital, and borrowings from commercial banks or other lenders. Management
expects that approximately $18.5 million of the net proceeds of the Offering
will be used to repay substantially all of the outstanding indebtedness of the
Constituent Companies. These borrowings are generally secured by substantially
all of the assets of the respective Constituent Company as well as the personal
guarantees of the respective owners.
The Company intends to enter into an agreement with a commercial bank to
establish a credit facility upon the completion of the Offering and anticipates
receiving a commitment from Signet Bank for such credit facility in the
principal amount of $20 million, of which $5 million will be available to
finance working capital requirements and $15 million will be available to
finance future acquisitions. Borrowings under the credit facility will be
secured by first priority liens on certain assets of the Company and its
subsidiaries, and will bear interest at a LIBOR or prime-based rate at the
Company's election. The definitive loan documents are expected to contain
standard representations, covenants, conditions, events of defaults and
indemnities. The Company expects it will be required to pay a facility fee at
closing of approximately $40,000 and customary annual commitment fees. Interest
will be payable monthly. The principal amount of the working capital facility
will be payable at its maturity, which will be the third anniversary of its
extension unless the maturity is extended. The principal amount of each
acquisition loan will be amortized on the basis of an agreed amortization term
not to exceed 60 months with all outstanding principal due at maturity.
The Company intends to spend approximately $1.5 million over a period of 18
months to upgrade substantially all of the Company-owned car wash facilities
with the full complement of HydroSpray car wash equipment and the proprietary
operating and marketing features of the Precision Auto Wash System described
herein. This will include building and facility improvements and the
installation and replacement of car wash equipment. The Company also intends to
invest approximately $500,000 in the Company's management information and
accounting systems at the retail and corporate level. The Company intends to
fund these expenditures through internally generated funds and, if necessary,
borrowings under the revolving credit facility.
Under the terms of the Combination Agreement, each of the Constituent
Companies (other than WE JAC) is entitled to distribute amounts of cash to its
owners necessary to enable the owners to pay the 1997 tax liabilities they are
expected to incur with respect to the operation of the applicable Constituent
Company through the Closing Date. Each of the Constituent Companies (including
WE JAC) also is entitled to distribute cash to their owners in amounts equal to
the amount of professional fees associated with the Combination and actually
paid by the Constituent Company prior to the closing of the Combination.
Management believes that the proceeds of the Offering, together with
internally generated working capital and any additional borrowings, will be
adequate to fund operations of the Company for the foreseeable future. The
Company may incur, from time to time, additional bank indebtedness and may
issue, in public or private transactions, equity or debt securities. Although
the Company expects to obtain a revolving credit facility, as discussed above,
there can be no assurance that sufficient additional financing will be available
on terms acceptable to the Company. Failure to obtain additional financing on
reasonable terms could have a negative effect on the Company.
Management intends to increase the Company's market share in part through
the acquisition and development of additional centers. Acquisitions may vary in
size and the Company may consider larger acquisition opportunities which could
be material to the Company. The Company expects it will use cash, stock, debt,
seller financing or a combination thereof to effect such transactions. There can
be no assurance that the Company will be able to acquire additional centers or
that additional centers that might be acquired would be successfully integrated
into the Company's operations.
22
<PAGE>
WE JAC
WE JAC revenues principally are derived from royalties paid by individual
franchisees to WE JAC, the sale of automotive parts and equipment to franchisees
and other automotive parts resellers, and the sale of individual franchises and
the sale of franchise development rights for specific geographic areas. Direct
costs consist of the portion of royalty payments made by franchisees that WE JAC
pays to area developers, the cost of parts and equipment, fees paid to area
developers for the sale of new franchises and corporate costs directly
associated with servicing and supporting the franchisee system. General and
administrative expenses include all legal, accounting, general overhead,
information technology and corporate staff expenses. Other income and expense
items consist of amortization, interest income and expense and other
miscellaneous costs. From time to time, WE JAC assumes the operation of
individual franchisee centers to maintain market position and system stability.
WE JAC incurs additional expenses when this occurs. The centers typically are
renovated, operations brought up to WE JAC standards, and remarketed to a new
franchisee.
SYSTEM OVERVIEW
The Precision Tune Auto Care system has been undergoing strategic change
since the early 1990's. At that time, company management began to expand the
retail menu of services offered at its centers in response to the advancing
technology of automotive engines and the diminished need for a traditional
tune-up. Menu additions included brake service, oil change and lubrication
services, and scheduled factory maintenance, among other things. A number of the
Company's underperforming franchised centers that were unable or unwilling to
transition their service offerings to keep pace with changes in automotive
technology were closed during the last four years.
WE JAC's current management team has continued this strategic repositioning
effort by preparing a definitive operations policy and procedures manual, adding
experienced field supervisory personnel, attempting to reposition the Company's
service menu in the eyes of the consumer by adding "Auto Care" to the name, and
redesigning the company's marketing and advertising materials to clearly
articulate the one-stop-shopping capabilities of a Precision Tune Auto Care
center. Once fully implemented, the Company believes that these efforts will
enable Precision Tune Auto Care franchisees to increase their sales per center.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of net revenue for the fiscal years ended June 30, 1995, 1996 and
1997 for WE JAC.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
<S> <C> <C> <C>
1995 1996 1997
---- ---- ----
<CAPTION>
(PERCENTAGE OF REVENUE)
<S> <C> <C> <C>
Net revenue....................................................................................... 100 % 100 % 100 %
Direct cost....................................................................................... 75 74 74
---- ---- ----
Contribution...................................................................................... 25 26 26
General and administrative expenses............................................................... 11 8 9
Amortization expense.............................................................................. 4 4 4
Company owned stores held for resale.............................................................. 2 2 0
---- ---- ----
Operating income.................................................................................. 8 12 13
Other income (expense)............................................................................ (9 ) (4 ) (4 )
---- ---- ----
Income (loss) before taxes........................................................................ (1 ) 8 9
Provision for income taxes........................................................................ 0 4 4
---- ---- ----
Net income (loss)................................................................................. (1 )% 4 % 5 %
---- ---- ----
---- ---- ----
</TABLE>
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Revenue. Revenue increased $723,000 or 3% to $27.4 million for the year
ended June 30, 1997 from $26.7 million for the year ended June 30, 1996. This
reflects increases of $757,000 in royalty revenue, $235,000 in franchise revenue
and $82,000 in other revenues which were offset by a $351,000 decrease in
revenues generated from the sale of equipment and parts. The increase in royalty
revenue resulted from an increase in system-wide sales reflecting the Company's
emphasis on a wider range of vehicle maintenance services instead of specialty
tune ups. While this has resulted in a lower average price per service visit,
the volume of service visits increased during the period. The Company's emphasis
on providing a wider range
23
<PAGE>
of vehicle maintenance services has resulted in a lower average cost per service
and a corresponding decrease in average parts sales per visit. The increase in
franchise revenue reflects the sale of international master licenses, consistent
with the Company's strategy to expand into international markets. Including
master license fees, franchise fees and royalties, total revenues derived from
international operations were $937,000 for the year ended June 30, 1997 compared
to $636,000 for the year ended June 30, 1996.
Direct Cost. Direct cost increased $583,000 or 3%, to $20.3 million for the
year ended June 30, 1997 from $19.7 million for the year ended June 30, 1996.
Direct cost as a percentage of revenue remained constant at 74% for 1997 and
1996, notwithstanding a $400,000 increase in expenses associated with franchisee
field operations and training support, marketing and communication costs focused
on the strategic repositioning of the business, and international and domestic
sales development costs. Equipment and parts costs decreased $196,000 which was
consistent with the decline in related sales.
Contribution. Contribution increased $140,000 or 2%, to $7.2 million for
the year ended June 30, 1997 from $7.0 million for the year ended June 30, 1996.
Contribution margin as a percentage of revenue remained constant at 26% for 1997
and 1996.
General and Administrative Expenses. General and administrative expenses
increased $246,000 or 11%, to $2.5 million for the year ended June 30, 1997 from
$2.2 million for the year ended June 30, 1996. General and administrative
expenses as a percentage of revenue increased to 9% for the year ended June 30,
1997 from 8% for the year ended June 30, 1996. This increase was primarily due
to the hiring of additional personnel and improvements made to the Company's
management information system.
Operating Income. Operating income increased $374,000 or 11%, to $3.7
million for the year ended June 30, 1997 from $3.3 million for the year ended
June 30, 1996. Operating income as a percentage of revenues increased to 13% for
the year ended June 30, 1997 from 12% for the year ended June 30, 1996. This
increase reflects the divestiture of Company-owned stores which were operated by
the Company in 1996 and negatively impacted the Company during that fiscal year.
Other Expense. Other expense increased $96,000 or 9% to $1.2 million for
the year ended June 30, 1997 from $1.1 million for the year ended June 30, 1996.
Other expense increased by $150,000 which was offset by net interest income of
$55,000.
Income Before Taxes. Income before taxes increased $278,000 or 12% to $2.5
million for the year ended June 30, 1997 from $2.2 million for the year ended
June 30, 1996. Income before taxes as a percentage of revenue increased to 9%
for the year ended June 30, 1997 from 8% for the year ended June 30, 1996.
Provision for Income Taxes. Provision for income taxes increased $93,000 or
8%, to $1.3 million for the year ended June 30, 1997 from $1.2 million for the
year ended June 30, 1996 due to the increase in income before taxes.
Net Income. Net income increased $185,000 or 17%, to $1.3 million for the
year ended June 30, 1997 from $1 million for the year ended June 30, 1996. Net
income as a percentage of revenue increased to 5% for the year ended June 30,
1997 from 4 % for the year ended June 30, 1996.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Revenue. Revenue increased $155,000, or 1%, to $26.7 million for the year
ended June 30, 1996 from $26.6 million for the year ended June 30, 1995. The
higher revenues are attributable to increases in royalty revenue of $153,000,
equipment and parts sales of $25,000, and franchise fees of $69,000. The
increases were offset by a decrease of $92,000 in other income. WE JAC revenues
remained stable for the year as the Company continued to refocus the services
offered from engine tune-ups to vehicle maintenance.
Direct Cost. Direct cost decreased $334,000, or 2%, to $19.7 million for
the year ended June 30, 1996 from $20.0 million for the year ended June 30,
1995. Direct cost as a percentage of revenues decreased from 75% for the year
ended June 30, 1995 to 74% for the year ended June 30, 1996. Direct cost
decreased as a result of a reduction in the allocation of corporate expense
associated with open area and center operations in the amount of $257,000.
Additionally, there was a $100,000 reduction in the cost of parts and equipment
due to improved purchasing procedures. Costs associated with franchise fees and
royalty revenue decreased $47,000 while revenues increased. This is attributed
to acquisitions of areas previously held by area subfranchisors.
24
<PAGE>
Contribution. Contribution increased $489,000, or 8%, to $7.0 million for
the year ended June 30, 1996 from $6.5 million for the year ended June 30, 1995.
Contribution as a percentage of revenues remained constant at 26% for the year
ended June 30, 1996.
General and Administrative Expenses. General and administrative expenses
decreased $612,000, or 21%, to $2.3 million for the year ended June 30, 1996
from $2.9 million for the year ended June 30, 1995. As a percentage of revenue,
general and administrative expenses decreased to 8% for the year ended June 30,
1996 from 11% for the year ended June 30, 1995. General and administrative
expenses were lower for the year as a result of a reduction in legal expenses.
This factor combined with a focus on cost containment had a significant effect
on general and administrative expenses.
Operating Income. Operating income increased $1 million, or 46%, to $3.3
million for the year ended June 30, 1996 from $2.3 million for the year ended
June 30, 1995. As a percentage of revenue, operating income increased to 12% for
the year ended June 30, 1996 from 8% for the year ended June 30, 1995. This
reflects decreased direct costs and general and administrative expenses.
Other Expense. Other expense decreased $1.4 million, or 56%, to $1 million
for the year ended June 30, 1996 from $2.4 million for the year ended June 30,
1995. Other expense decreased primarily because the 1995 results of operations
included the settlement of and legal fees associated with disputes involving an
area subfranchisor and franchisee in the amount of $1.2 million.
Income (Loss) Before Taxes. Income before taxes increased $2.4 million to
$2.2 million for the year ended June 30, 1996 from a loss before taxes of
$152,000 for the year ended June 30, 1995. Income before taxes as a percentage
of revenue increased to 8% for the year ended June 30, 1996 from a loss before
taxes for the year ended June 30, 1995. This increase can be attributed to the
one time charge in 1995 related to legal fees and settlement costs of franchisee
litigation recorded in fiscal 1995.
Provision for Income Taxes. Provision for income taxes increased $1.1
million to $1.2 million for the year ended June 30, 1996 from $72,000 for the
year ended June 30, 1995 due to the increase in income before taxes.
Net Income (Loss). Net income increased $1.2 million to $1.1 million for
the year ended June 30, 1996 from a loss of $67,000 for the year ended June 30,
1995. Net income as a percentage of revenue increased to 4% for the year ended
June 30, 1996 from a loss for the year ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of WE JAC:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
<S> <C> <C> <C>
1995 1996 1997
------- ------- -------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities..................................................... $ 1,949 $ 462 $ 2,207
Net cash used in investing activities......................................................... (504) (1,176) (891)
Net cash provided by (used in) financing
activities.................................................................................. (1,852) 933 (1,491)
------- ------- -------
Change in cash and cash equivalents........................................................... $ (407) $ 219 $ (175)
------- ------- -------
------- ------- -------
</TABLE>
From July 1, 1996 through June 30, 1997, WE JAC generated $2.2 million in
net cash from operating activities. This amount was higher than the net cash
provided by operating activities for the year ended June 30, 1996 principally
because of changes in working capital, most notably, accounts payable and
accrued expenses, and income taxes. Accounts receivable increased by $1.0
million during this period. This change is comprised of an increase in royalty
receivables of $470,000, primarily as a result of an increase in retail sales
during the month of June 1997, and an increase in master license fee receivables
of $270,000 from the sale of international development rights in the same month.
In addition, rent receivables increased $160,000 from the sale of company owned
stores held for resale during the year resulting in accounts receivable from the
franchisees which have sub-leased the centers. The allowance for bad debts
decreased by approximately $233,000 primarily because the Company wrote off
approximately $450,000 of receivables against the reserve during the year. These
changes did not have a material impact on the Company's liquidity and cash flow.
25
<PAGE>
Inventory decreased $365,000 for the year ended June 30, 1997 from June 30,
1996. The decrease is attributable to the sale of Company centers and their
associated inventory and the change in the mix of inventory from higher cost
electronic parts to lower cost vehicle and engine maintenance parts. This change
had a corresponding positive impact on liquidity.
During the year ended June 30, 1997, cash used in investing activities
consisted of $296,000 used to purchase property and equipment, $545,000 used to
purchase franchise agreements and rights. Cash used in financing activities was
primarily attributable to $2.8 million received from a term loan offset against
the purchase of treasury stock from a former officer for $2.4 million and the
repayment of long-term debt and notes payable of $2,000,000.
From July 1, 1995 through June 30, 1996, WE JAC generated $462,000 in net
cash from operating activities. This amount was substantially lower than the net
cash provided by operating activities for the year ended June 30, 1995 in spite
of higher net income because of changes in working capital, principally accounts
payable and accrued expenses, and income taxes. Cash used in investing
activities consisted of $358,000 used to purchase property and equipment, and
$754,000 to purchase franchise rights. Cash provided from financing activities
was attributable to $1.1 million received from the sale of stock less $170,000
in net decreases in debt.
From July 1, 1994 through June 30, 1995, WE JAC generated $1.9 million in
net cash from operating activities. During this period, $67,000 resulted from a
net loss, and the remainder was generated from reductions in working capital.
Cash used in investing activities consisted of $504,000 used to purchase
property and equipment. Cash used in financing activities was attributable to
$1.1 million in net payments on debt, and a repurchase of stock warrants of
$750,000.
THE OHIO GROUP
Ohio Group revenue is derived primarily from the operation of car wash
centers, the sale of car wash equipment and fast-oil change buildings and to a
lesser extent the sale of parts and supplies and franchise and royalties fees.
For the period ended June 30, 1997, the Company derived $1.6 million from the
operation of car wash centers, $7.1 million from the sale of car wash equipment,
$1.8 million from the sale of fast oil change buildings, $820,000 from the sale
of parts and supplies, and $354,000 from franchise and royalty fees. Direct
costs are those related to the manufacture and installation of car wash
equipment and automobile lubrication facilities, as well as direct costs
associated with the operation of Company-owned car wash and fast oil change and
lube centers. General and administrative expenses include all accounting,
general overhead, information technology and corporate staff. Other
income/expense consists of other expenses associated with Company-owned store
operations, amortization, depreciation and interest expense.
The Ohio Group acquired a 90% interest in HydroSpray in February 1996 in a
transaction in which the Ohio Group assumed $1.0 million of current liabilities
and refinanced $1.3 million of long term debt through a new bank loan. In
connection with the purchase, the Ohio Group converted $500,000 of debt it had
extended to HydroSpray previously into equity. Because the HydroSpray division
sells both equipment and parts and supplies, the Ohio Group has shifted the
sales of its parts and supplies to HydroSpray after it was acquired.
Sales by the Ohio Group are impacted by seasonal factors. Low sales by the
HydroSpray division for quarters ended March 31, reflect the difficulty in
delivering and installing car wash equipment in winter months. Severe winter
weather and rainy conditions can also negatively impact car wash operations
while normal winter conditions increase the demand for car wash services.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenue for the years ended December 31, 1994, 1995 and 1996 and
for the six months ended June 30, 1996 and 1997 for the Ohio Group:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<CAPTION>
(PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C>
Revenue..................................................................... 100 % 100 % 100 % 100 % 100 %
Direct cost................................................................. 68 84 81 83 87
---- ---- ---- ---- ----
Contribution................................................................ 32 16 19 17 13
General and administrative expenses......................................... 25 16 13 17 16
---- ---- ---- ---- ----
Operating income (loss)..................................................... 7 0 6 0 (3 )
Other expense............................................................... (5 ) (7 ) (5 ) (7 ) (10 )
---- ---- ---- ---- ----
Net Income (loss)........................................................... 2 % (7 )% 1 % (7 )% (13 )%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue decreased $42,000, or 1%, to $4.4 million for the six
months ended June 30, 1997 from $4.5 million for the six months ended June 30,
1996. The decrease was attributable to a decrease in service revenues resulting
from severe rains and poor weather in the spring of 1997 which adversely
impacted car wash equipment installation and car wash sales. The decrease in
revenue was offset by increased sales of $95,000 in Lube Ventures equipment and
$52,000 in Lube Depot franchise fees and royalties. Car wash product and
equipment sales decreased $162,000 and car wash retail sales decreased $27,000.
Direct Cost. Direct cost increased $160,000, or 4%, to $3.8 million for the
six months ended June 30, 1997 from $3.7 million for the six months ended June
30, 1996. Direct cost as a percentage of revenue increased to 87% for the six
months ended June 30, 1997 from 83% for the six months ended June 30, 1996. Car
wash product and equipment costs increased $68,000. A significant factor in the
increase was that the period included two more months of fixed costs associated
with the HydroSpray operation than during the previous year.
Contribution. Contribution decreased $202,000, or 26 % to $567,000 for the
six months ended June 30, 1997 from $769,000 for the six months ended June 30,
1996. The decrease is primarily attributable to increased marketing expenses and
the adverse impact of the poor spring weather.
General and Administrative Expenses. General and administrative expenses
decreased $22,000, or 3%, to $722,000 for the six months ended June 30, 1997
from $744,000 for the six months ended June 30, 1996. General and administrative
expenses as a percentage of revenues decreased to 16% in 1997 from 17% in 1996.
Operating Income (Loss). Operating loss increased $180,000 to $(155,000)
for the six months ended June 30, 1997 from operating income of $25,000 for the
six months ended June 30, 1996. Operating loss as a percentage of revenue
decreased to (3)% in 1997 from 0% in 1996. The 1996 operating loss would have
been increased by $95,000 had the acquisition of HydroSpray occured prior to
February 29, 1996, as the quarter ending March 31 is generally the least
profitable quarter.
Other Expense. Other expense increased $103,000, or 33%, to $413,000 for
the six months ended June 30, 1997 from $310,000 for the six months ended June
30, 1996. The change was a result of the increase in interest expense associated
with the assumption of the debt obligations of HydroSpray and indebtedness
incurred in connection with the acquisition of new car wash facilities.
Net Income (Loss). Net loss increased $283,000, or 99%, to $568,000 for the
six months ended June 30, 1997 from $285,000 for the six months ended June 30,
1996. Net loss as a percentage of revenue increased to (13)% for the six months
ended June 30, 1997 from (7)% for the six months ended June 30, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $6.9 million, or 141%, to $11.8 million for the
year ended December 31, 1996 from $4.9 million for the year ended December 31,
1995. This change was due to the acquisition of a 90% interest in HydroSpray
representing approximately $6.0 million in sales, increased sales in Lube
Ventures of $753,000, the fast oil change and
27
<PAGE>
lubrication operation, and the purchase of five additional car washes operated
as company-owned centers which contributed $320,000 in additional revenues.
These increases were partially offset by a $245,000 anticipated decrease in
parts sales from discontinued lines.
Direct Cost. Direct cost increased $5.4 million, or 132%, to $9.6 million
for the year ended December 31, 1996 from $4.1 million for the year ended
December 31, 1995. Direct cost as a percentage of revenue decreased to 81% for
the year ended December 31, 1996 from 84% for the year ended December 31, 1995.
The acquisition of HydroSpray accounted for an increase of $5.3 million. Direct
costs for car wash operations increased $440,000 due to higher fixed costs as a
result of newly acquired car washes which was offset by a decrease of $177,000
in car wash equipment and product sales.
Contribution. Contribution increased $1.5 million, or 192%, to $2.2 million
for the year ended December 31, 1996 from $768,000 for the year ended December
31, 1995. The increase is primarily a result of an increase in revenues relating
to the acquisition of HydroSpray.
General and Administrative Expenses. General and administrative expenses
increased $722,000, or 92%, to $1.5 million for the year ended December 31, 1996
from $782,000 for the year ended December 31, 1995. General and administrative
expenses as a percentage of revenue decreased to 13% in 1996 from 16% in 1995 as
expenses were spread across a larger revenue base.
Operating income. Operating income increased $750,000 to $736,000 for the
year ended December 31, 1996 from a loss for the year ended December 31, 1995.
Operating income as a percentage of revenue increased to 6% for the year ended
December 31, 1996 from a loss for the year ended December 31, 1995.
Other Expense. Other expense increased $312,000, or 92%, to $650,000 for
the year ended December 31, 1996 from $338,000 for the year ended December 31,
1995. The increase primarily consisted of a $160,000 increase in interest
expense relating to HydroSpray and $137,000 in interest expense related to new
indebtedness incurred in connection with building new car wash operations.
Net Income (Loss). Net income increased $438,000 to $86,000 for the year
ended December 31, 1996 from a loss of $(352,000) for the year ended December
31, 1995. Net income as a percentage of revenue increased to 1% for the year
ended December 31, 1996 from a loss for the year ended December 31, 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue increased $1.7 million, or 55%, to $4.8 million for the
year ended December 31, 1995 from $3.1 million for the year ended December 31,
1994. Revenue increased from the purchase of the Lube Venture operation which
represented $1.3 million of the $1.7 million increase. Revenue from car washes
increased $484,000 as a result of several acquisitions.
Direct Cost. Direct cost increased $1.8 million, or 80%, to $4.1 million
for the year ended December 31, 1995 from $2.3 million for the year ended
December 31, 1994. Direct cost as a percentage of revenue increased to 84% for
the year ended December 31, 1995 from 74% for the year ended December 31, 1994.
Direct costs increased from the initial costs associated with developing the
franchising operation for Lube Ventures. Lube Ventures incurred direct costs
totalling $1.4 million. Direct cost for car wash operations increased $262,000.
Product and equipment distribution costs increased $120,000.
Contribution. Contribution decreased $246,000, or 24%, to $768,000 for the
year ended December 31, 1995 from $1.0 million for the year ended December 31,
1994. Contribution as a percentage of revenue decreased to 16% for the year
ended December 31, 1995 from 32% for the year ended December 31, 1994.
Contribution decreased as a result of the increase in direct costs and revenues.
General and Administrative Expenses. General and administrative expenses
remained flat at approximately $780,000 in both 1994 and 1995. General and
administrative expenses as a percentage of revenues decreased to 16% for the
year ended December 31, 1995 from 25% for the year ended December 31, 1994. The
percentage decrease was due to the larger revenue base that general and
administrative cost were applied against. An increase in the actual dollar cost
of general and administrative costs was associated with adding the franchising
capability of the Lube Venture operation and the increased costs of a larger
operation.
Operating Income (Loss). Operating loss increased $248,000 to $(14,000) for
the year ended December 31, 1995 from operating income of $234,000 for the year
ended December 31, 1994. Operating loss as a percentage of revenue decreased to
28
<PAGE>
0% for the year ended December 31, 1995 from 7% for the year ended December 31,
1994. Income from operations increased as a result of the Lube Ventures
purchase.
Other Expense. Other expense increased $166,000, or 96%, to $338,000 for
the year ended December 31, 1995 from $172,000 for the year ended December 31,
1994. Additional interest costs from the acquisition increased other expenses.
Net Income (Loss). Net income decreased $414,000 to $(352,000) for the year
ended December 31, 1995 from $62,000 for the year ended December 31, 1994. Net
loss as a percentage of revenue decreased to (7)% for the year ended December
31, 1995 from net income as a percentage of revenue of 2% for the year ended
December 31, 1994. Net income decreased from the additional initial costs of
acquisition and franchising.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of the Ohio Group:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
-------------- -------------- -------------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities........................................ $ 176 $ 878 $ (745) $ (878)
Net cash used in investing activities............... (971) (3,677) (3,610) (186)
Net cash provided by financing activities........... 1,124 2,605 4,146 1,096
-------------- -------------- -------------- --------------
Change in cash and cash equivalents................. $ 329 $ (194) $ (209) $ 32
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
During the six months ended June 30, 1997, the Ohio Group used cash of
$878,000 in operating activities. During this period, $168,000 related to net
loss before non-cash charges, and $709,000 from reductions in working capital
accounts. In the first six months ended June 30, 1996, the Ohio Group used $3.6
million in investing activities largely for the acquisition of a 90% interest in
HydroSpray Equipment Co., Ltd. and additional car wash facilities. During the
six months ended June 30, 1997, the Ohio Group generated cash from financing
activities of $1.1 million consisting of $136,000 from the sale of common stock
and $1.0 million in net proceeds from debt.
From January 1, 1995 through December 31, 1996, the Ohio Group generated
$1,054,000 in net cash from operating activities. During this period, $875,000
was generated from net income before non-cash charges, and $179,000 from
reductions in working capital. Cash used in investing activities was
attributable to $4.3 million in purchases of property and equipment (primarily
related to the HydroSpray acquisition), $150,000 from a net increase in
outstanding notes receivable, $145,000 for investments, and $50,000 in other
purchases. Cash used in financing activities was attributable to $330,000 for
the purchase of treasury stock, and $33,000 in payment of dividends. Financing
sources consisted of $995,000 received upon the sale of common stock and $3.1
million in net proceeds from debt.
ALL OTHER CONSTITUENT COMPANIES
Revenues for All Other Constituent Companies are derived primarily from car
wash operation sales. Contribution margin consists of direct costs related to
car wash operations including facilities, personnel, utilities, maintenance and
supplies. General and administrative expenses include all accounting, general
overhead, information technology and executive expenses. Other income/expense
consists of other expenses associated with company-owned store operations,
amortization and depreciation expense and interest expense.
Sales by all other Constituent Companies are impacted by several factors.
Severe winter weather and rainy conditions can negatively impact car wash
operations while normal winter conditions generally increase the demand for car
wash services.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of revenue for the years ended December 31, 1994, 1995 and 1996 and
for the six months ended June 30, 1996 and 1997 for All Other Constituent
Companies.
29
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<CAPTION>
(PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C>
Revenue..................................................................... 100 % 100 % 100 % 100 % 100 %
Direct cost................................................................. 44 55 53 49 51
---- ---- ---- ---- ----
Contribution................................................................ 56 45 47 51 49
General and administrative expenses......................................... 38 29 28 30 30
---- ---- ---- ---- ----
Operating income............................................................ 18 16 19 21 19
Other expense............................................................... (17 ) (12 ) (10 ) (12 ) (9 )
---- ---- ---- ---- ----
Net Income.................................................................. 1 % 4 % 9 % 9 % 10 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Revenue remained essentially constant at $1.2 million for the six
months ended June 30, 1997 and for the six months ended June 30, 1996. The
relatively constant sales were attributed to severe rain conditions that reduced
sales from the Ohio operations by 11% or $27,000 which offset a $40,000 or 4%
increase in sales from the Denver operations.
Direct Cost. Direct cost increased $25,000 or 4%, to $605,000 for the six
months ended June 30, 1997 from $580,000 for the six months ended June 30, 1996.
Direct cost as a percentage of revenue increased to 51% for the six months ended
June 30, 1997 from 49% for the six months ended June 30, 1996. Direct cost, as a
percentage of revenue increased principally as a result of relatively fixed
direct costs associated with the Ohio operation coupled with reduced sales
during the period.
Contribution. Contribution decreased $13,000, or 2%, to $592,000 for the
six months ended June 30, 1997 from $605,000 for the six months ended June 30,
1996. Contribution was adversely affected by the reduction in sales from the
Ohio operation, combined with no offsetting decrease in fixed direct costs.
General and Administrative Expenses. The level of general and
administrative expenses remained relatively constant during the period and have
remained essentially constant as a percentage of revenue.
Operating Income. Operating income decreased $15,000 or 5%, to $230,000 for
the six months ended June 30, 1997 from $245,000 for the six months ended June
30, 1996. Operating income as a percentage of revenue decreased to 19% for the
six months ended June 30, 1997 from 21% for the six months ended June 30, 1996.
Other Expense. Other expense decreased $35,000 or 31%, to $111,000 for the
six months ended June 30, 1997 from $161,000 for the six months ended June 30,
1996. Other expense as a percentage of revenue decreased to 9% for the six
months ended June 30, 1997 from 12% for the six months ended June 30, 1996. The
decrease consists primarily of a reduction in interest expense.
Net Income. Net income increased $20,000 or 20%, to $119,000 for the six
months ended June 30, 1997 from $99,000 for the six months ended June 30, 1996.
Net income as a percentage of revenue increased to 10% for the six months ended
June 30, 1997 from 9% for the six months ended June 30, 1996. The change in net
income is principally attributed to the decrease in other expense.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue increased $105,000, or 5%, to $2.2 million for the year
ended December 31, 1996 from $2.1 million for the year ended December 31, 1995.
This change was primarily due to sales increases at each of the facilities,
particularly at the Company's prototype operation located in Denver, Colorado.
Direct Cost. Direct cost increased $27,000, or 2%, to $1.2 million for the
year ended December 31, 1996 from $1.1 million for the year ended December 31,
1995. Direct cost as a percentage of revenue decreased to 53% for the year ended
December 31, 1996 from 55% for the year ended December 31, 1995. Direct costs,
as a percentage of revenue, decreased by holding fixed costs relatively constant
as revenues increased.
Contribution. Contribution increased $78,000, or 8%, to $1.0 million for
the year ended December 31, 1996 from $939,000 for the year ended December 31,
1995. This change is attributable to the revenue increase and stability of
direct costs.
30
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased $11,000 or 2%, to $611,000 for the year ended December 31, 1996 from
$600,000 for the year ended December 31, 1995. This increase was due primarily
to increased professional fees and personnel costs required to support continued
growth. General and administrative expenses remained constant as a percentage of
revenue.
Operating Income. Operating income increased $67,000, or 20%, to $406,000
for the year ended December 31, 1996 from $339,000 for the year ended December
31, 1995. Operating income as a percentage of revenue increased to 19% for the
year ended December 31, 1996 from 16% for the year ended December 31, 1995. The
change in operating income improved through increased revenue and stable direct
costs.
Other Expense. Other expense decreased $38,000, or 15%, to $218,000 for the
year ended December 31, 1996 from $256,000 for the year ended December 31, 1995.
Other expense as a percentage of revenue decreased to 10% for the year ended
December 31, 1996 from 12% for the year ended December 31, 1995. The decrease
consists of a reduction in interest and rent expense.
Net Income. Net income increased $105,000, or 126%, to $188,000 for the
year ended December 31, 1996 from $83,000 for the year ended December 31, 1995.
Net income as a percentage of revenue increased to 9% for the year ended
December 31, 1996 from 4% for the year ended December 31, 1995. The change in
net income is attributed to the increase in revenues while holding or reducing
direct and other costs.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue increased $53,000, or 26%, to $2.1 million for the year
ended December 31, 1995 from $2.0 million for the year ended December 31, 1994.
Revenues increased from the increased use of repeat customer promotions and
targeted advertising.
Direct Cost. Direct cost increased $238,000, or 27%, to $1.1 million for
the year ended December 31, 1995 from $893,000 for the year ended December 31,
1994. Direct cost as a percentage of revenue increased to 55% for the year ended
December 31, 1995 from 44% for the year ended December 31, 1994. Direct costs
increased from an additional investment in control systems and new facilities
and a re-allocation of certain general and administrative expenses to direct
costs.
Contribution. Contribution decreased $185,000, or 16%, to $939,000 for the
year ended December 31, 1995 from $1.1 million for the year ended December 31,
1994. Contribution as a percentage of revenue decreased to 45% for the year
ended December 31, 1995 from 56% for the year ended December 31, 1994.
Contribution decreased primarily as a result of the increase in direct costs.
General and Administrative Expenses. General and administrative expenses
decreased $164,000, or 21%, to $600,000 for the year ended December 31, 1995
from $764,000 for the year ended December 31, 1994. General and administrative
expenses as a percentage of revenues decreased to 29% for the year ended
December 31, 1995 from 38% for the year ended December 31, 1994. To more
accurately reflect the nature of the costs of the business, a re-allocation of
costs from general and administrative to direct was made. This accounts for the
majority of the increase in direct costs and decrease in general and
administrative costs.
Operating Income. Operating income decreased $21,000, or 6%, to $339,000
for the year ended December 31, 1995 from $360,000 for the year ended December
31, 1994. Operating income as a percentage of revenue decreased to 16% for the
year ended December 31, 1995 from 18% for the year ended December 31, 1994.
Operating income decreased as a result of the increase in direct costs
associated with new systems development.
Other Expense. Other expenses decreased $92,000, or 26%, to $256,000 for
the year ended December 31, 1995 from $348,000 for the year ended December 31,
1994. Other expenses as a percentage of revenue decreased to 12% for the year
ended December 31, 1995 from 17% for the year ended December 31, 1994. Other
expenses decreased from debt refinancing and cost control.
Net Income. Net income increased $71,000, or 591%, to $83,000 for the year
ended December 31, 1995 from $12,000 for the year ended December 31, 1994. Net
income from operations as a percentage of revenue increased to 4% for the year
ended December 31, 1995 from 1% for the year ended December 31, 1994. Net income
benefited from the increase in revenues and the decrease in general and
administrative and other expenses offset by the increase in direct costs.
31
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of all other Constituent Companies:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ----------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
----- ----- ----- -----
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities...................................... $ 390 $ 481 $ 154 $ 295
Net cash used in investing activities.......................................... (464) (153) (76) (168)
Net cash used in financing activities.......................................... 109 (331) (96) (125)
----- ----- ----- -----
Change in cash and cash equivalents............................................ $ 35 $ (3) $ (18) $ 2
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
During the six months ended June 30, 1997, the Other Constituent Companies
generated cash from operating activities of $295,000 as compared to $154,000 in
the same period in the prior year. The majority of cash flows from operations
relates to non-cash charges of $130,000 and $243,000 during 1996 and 1997,
respectively. In the six months ended June 30, 1997, All Other Constituent
Companies used $168,000 in investing activities largely attributable to the
acquisition of property and equipment. During the six months ended June 30,
1997, All Other Constituent Companies used cash in financing activities of
$125,000 which was attributable to payments on long-term debt.
From January 1, 1995 through December 31, 1996, All Other Constituent
Companies generated $871,000 in net cash from operating activities. During this
period, $880,000 was generated from net income before non-cash charges, and
$9,000 was used in the reduction of working capital. Cash used in investing
activities was attributable to $635,000 in purchases of property and equipment
offset by payments on notes receivable of $18,000. Investing sources consisted
of $265,000 from a net decrease in outstanding notes receivable. Cash used in
financing activities was attributable to $109,000 in net payments on debt,
$83,000 for the purchase of treasury stock, and $31,000 in other financing
activities.
32
<PAGE>
BUSINESS
GENERAL
Upon completion of the Offering and the Combination, management believes
that Precision Auto Care will be a leading provider of comprehensive automotive
maintenance services. These services will be marketed under the "Precision"
brand and include three distinct operations: (i) Precision Tune Auto Care, an
existing international chain of automotive service franchises; (ii) Precision
Auto Wash, an operator and franchisor of a chain of self-service and touchless
automatic car wash centers; and (iii) Precision Lube Express, an operator and
franchisor of a chain of modular fast oil change and lube centers. The Company's
mission is to be the premier provider of quality car care services worldwide by
exceeding its customers' expectations.
The management team headed by John F. Ripley, the Company's president and
chief executive officer, joined Precision Tune Auto Care, the operating
subsidiary of WE JAC Corporation (the largest Constituent Company), in July of
1995 and developed a strategic plan to capitalize on the market opportunities
presented to Precision Tune Auto Care. The primary goal of the strategic plan is
to grow the Company into a multiple-solutions provider of automotive services by
effectively cross-marketing the depth and breadth of the Company's services.
The Company intends to employ the following strategies to accomplish its
objectives:
(Bullet) Leverage Precision Tune Auto Care's broad brand name recognition
and existing market position in the automotive services business
into the car wash and fast oil change and lube sectors of the
automotive aftermarket;
(Bullet) Provide existing Precision Tune Auto Care franchisees with
cross-selling opportunities to their customer base and local
market position by adding Precision Auto Wash and Precision Lube
Express operations at or in close proximity to their existing
centers;
(Bullet) Develop cross-marketing programs among franchisees throughout the
Precision Auto Care system that would enable franchisees to
maximize their returns on advertising spending;
(Bullet) Capitalize on the Company's vertically integrated manufacturing
and distributing capabilities to provide a broad array of products
to franchisees, including automotive parts and service equipment,
car wash equipment, chemicals and supplies, and modular fast oil
change and lube buildings; and
(Bullet) Consolidate the automotive maintenance service industry through
strategic acquisitions and the conversion of centers operated by
competitors into Precision Auto Care franchises or Company-owned
centers.
The market for automotive services is large, growing and highly fragmented.
The Company expects that the market for its services will continue to grow
primarily due to a continuing shift of consumer preference from the
"do-it-yourself" to the "do-it-for-me" sector. The Company believes that no
national brand leader currently markets the full range of automotive maintenance
services the Company provides and that the fragmented nature of the industry
presents a unique opportunity to amass market share. The Company's manufacturing
capabilities will provide an opportunity for the Company to make cost-effective
conversions of its competitors' car washes and fast oil change and lube centers
into Precision Auto Care franchises or Company-owned centers, enabling the
Company to consolidate these sectors of the industry more quickly.
At June 30, 1997, the Company had 556 franchise Precision Tune Auto Care
centers, 34 Company-owned car washes and 21 franchise and four Company-owned
fast oil change and lube express centers. For the year ended June 30, 1997,
after giving effect to the Offering and the acquisition of Worldwide, pro forma
Company revenue, operating income and net income were $43.0 million, $4.6
million and $2.0 million, respectively.
INDUSTRY OVERVIEW
The automotive maintenance service market is large, growing and highly
fragmented. Management believes these characteristics present a unique
opportunity for a quality national brand to achieve internal growth and to gain
market share through consolidation.
The domestic automotive service, car wash and quick lube sectors totaled
approximately $100 billion in 1996, up from $95 billion in 1995 according to the
Automotive Parts and Accessories Association and the International Car Wash
Association. According to the Automotive Parts and Accessories Association 1996
Aftermarket Factbook, there are approximately 200 million cars and light trucks
in the United States today. The Company estimates that its current market share
is less than 1% of this market.
33
<PAGE>
The Company expects that the market for the services it provides will
continue to grow as more consumers seek to have services performed for them
("do-it-for-me") rather than performing those services themselves
("do-it-yourself"). According to Lang Marketing Resources, Inc., the
do-it-for-me segment increased from 67% to 72% from 1985 to 1995 while the
do-it-yourself format showed a corresponding decrease. The Company believes the
principal factors causing this shift in consumer preference are as follows:
(Bullet) The consumer desire for one-stop shopping, convenience and value;
(Bullet) An aging and time sensitive population;
(Bullet) The increase in two wage-earning households;
(Bullet) Greater technical complexity in today's vehicles; and
(Bullet) Competitive pricing to many "do-it-yourself" services.
The FIND/SVP (March 1995) Report, Market for Aftermarket Services estimates that
this trend should continue and projects annual growth rates of 5.8%, 6.8% and
13.6% in oil change, tune-up, and brake services sectors, respectively, through
1999. Additional industry factors which the Company believes will increase the
demand for its services include (i) a continuing decline in the number of
service bays at automobile dealerships, (ii) the increasing cost of new cars and
the relative percentage of that cost to median family income and (iii) the
increasing age of the average vehicle (9.3 years in 1996 compared to 6.9 years
in 1981).
The Company's consumer research indicates that the fragmentation of the
industry is exemplified in the fact that automobile dealerships, which do not
currently have significant national or international name brand recognition,
represent Precision Tune Auto Care's primary competition. While automobile
dealerships do not have significant brand recognition, the fact that they are
authorized to provide services by the manufacturers of the automobiles they sell
provides them with credibility as a premium provider of automotive maintenance
service for such brands of automobiles. Other participants in the automotive
service sector include parts suppliers, tire companies, and regional service
specialists, none of which are deemed by management to be national service
providers with strong top-of-mind brand awareness. The International Car Wash
Association estimates that there are approximately 75,000 car wash facilities in
North America. The Company is not aware of any national or significant regional
competitors in this sector. Precision Lube Express competes in a fast lube
industry marked with national chains such as Jiffy Lube, Q Lube, Texaco's
Express Lube and Valvoline's Instant Oil Change, as well as a number of smaller,
regional chains and independent operators.
The Company believes that the size, growth and fragmentation of the markets
in which it operates present significant opportunities for a national brand with
a reputation for quality. For example, the car wash business and significant
portions of the fast oil change and lube business historically have been
populated with local operators who rarely upgrade or improve their facilities.
Moreover, recent technological improvements in car wash equipment and chemicals
now allow for more consistent and higher quality service. The Company believes
that a large national brand can attract a greater part of the market as
consumers become aware of these features and experience consistent quality,
appearance and service standards throughout the Precision Auto Care system.
COMPETITIVE STRENGTHS
Precision Auto Care believes that the following characteristics provide
competitive advantages:
Strong Brand Awareness. Although the Company has not conducted operations
under the Precision Auto Wash or Precision Lube Express name, Precision Tune
Auto Care has been in existence since 1977 and, with 468 domestic centers and 88
international centers as of June 30, 1997, has achieved significant awareness of
the Precision brand name. The Company's centers are located in 39 states and
five countries. The logos, signage, and building identity package for Precision
Lube Express and Precision Auto Wash have been designed to be complementary with
and to extend this brand awareness, which management believes will provide
significant opportunities for cross promotion of the three businesses. The
Company expects that this cross promotion will allow the Company to utilize
national broadcast advertising more effectively and earlier than would otherwise
be the case, creating top-of-the mind brand awareness among consumers.
One-Stop-Shop "Do-It-For-Me" Service Capability. In addition to providing a
full range of automotive maintenance services at Precision Tune Auto Care, the
Company believes its franchisees can successfully add Precision Lube Express
bays to Precision Auto Wash centers and Precision Auto Wash touchless wash bays
to Precision Tune Auto Care and Precision Lube Express centers, thereby
maximizing customer convenience and Company and franchisee revenues and
earnings. The
34
<PAGE>
Company believes that positioning the Company as a one-stop, multiple-solutions
provider of automotive maintenance services (many of which are essential to
vehicle maintenance) will be very attractive to today's drivers, many of whom
are faced with increasing time pressures.
Experienced and Proven Full Service Franchising Capability. Precision Tune
Auto Care has been engaged in franchising for 20 years and has been named as one
of the top franchises in the United States and the world by publications such as
Entrepreneur Magazine, Success Magazine, Money Magazine, and Franchise Buyer.
The Company supports its franchisees with a vertically integrated support
system, including operations, customer service, marketing and training support
and computerized systems at the retail level, site selection and service center
development assistance, parts and supplies distribution, auto wash equipment
manufacturing and installation, lube express building manufacturing and
installation, and if desired, monthly accounting and financial reporting
assistance. The Company utilizes a dual approach to sell franchises. There
currently are 31 Precision Tune Auto Care area developers who have existing
rights to develop certain territories. The Company's new management has recently
refocused the Company's infrastructure to market sales of franchises directly to
prospective franchisees in areas not covered by these subfranchisors.
Superior Technical Capabilities and Customer Service. Precision Tune Auto
Care's highly trained technicians specialize in high end "under-the-hood"
automotive maintenance services and engine diagnostics. Given the increasing
complexity of today's vehicles, management believes that the Company's highly
trained technicians give the Company a competitive advantage over many of its
competitors, whose technicians are not as well trained, and over
"do-it-yourself" consumers, who typically are unqualified to repair and maintain
modern engine systems. The Company supports its services with a comprehensive
warranty program. The Company's technical capabilities also are supported by a
series of quality-oriented programs, including the training of center personnel
in how to provide high quality customer service, centralized customer service
"800" numbers, extensive store evaluation and "mystery shopper" programs,
computerized in-store educational kiosks, use of quality parts, and a pricing
policy which aims to provide customers with Precision Value, which the Company
defines as quality, service and convenience at a fair price.
Attractive Unit Economics. When operated in accordance with Company
guidelines, each of the three types of retail centers can provide attractive
economic returns to the owner. The Company believes that these economic
opportunities will be enhanced by the ability to cross promote the Precision
brand through the three different types of retail centers. The Company also
believes that the levels of initial investment required of franchisees make the
Company's franchises economically attractive. Of particular note is the
relatively low cost of entry into the fast oil change and lube business
facilitated by the Company's modular fast lube building. Management believes the
modular fast oil change and lube building provides a significant competitive
advantage over its competitors which require more expensive build-to-suit
buildings with pits or a basement.
Motivated Owner-Operators. Although the Precision Tune Auto Care system has
several successful franchisees who own large numbers of centers, the average
franchisee owns between one and three centers. Management believes that a
substantial majority of these franchisees operate Precision Tune Auto Care
centers as their primary source of income and are therefore highly motivated to
maximize their retail center sales and profits.
Experienced Management. As a team, the Company's senior officers have
extensive experience in the automotive aftermarket sector, franchising
operations, and the management of publicly-held growth companies. This
management team has implemented a series of programs designed to give the
Company a common vision, shared goals and a culture of responsibility and
accountability.
GROWTH STRATEGY
The Company's growth strategy centers on the following elements:
Maximizing Service Center Profitability. The Company believes that
maximizing service center profitability is vital to the stability and growth of
the Precision Auto Care system. Accordingly, the Company continually seeks to
identify, develop and promote systems, products, and practices that enhance the
awareness of the Precision name, grow retail sales, and control service center
operating costs. The Company has identified a strategy to become a nationally
recognized leader in the automotive service industry by offering the services of
its three types of operating units under one brand name. In addition to
providing cross-promotional and other marketing opportunities, the Company
believes that the combination of up to the three types of individual services
offered by the Company at the same location or in close proximity will provide
added customer convenience and can generate superior economic returns to the
center operators. For example, if space is available Precision Lube Express bays
can quickly and economically be added to an existing Precision Auto Wash
facility. Such combinations
35
<PAGE>
increase the level of service to the customer, allowing the operator to provide
cross-promotions to encourage the frequent usage of the services offered by each
unit.
Service Center Growth. Precision Tune Auto Care intends to utilize its
franchising capability and experience and its existing center base to cross-sell
Precision Auto Wash and Precision Lube Express franchises. The Company's
domestic franchising efforts seek to establish critical mass in regional
markets. Although it has relied heavily on area subfranchisors in the past, the
Company intends to utilize direct franchising versus franchising through area
developers in the future. The Company's international expansion efforts will
continue to utilize master franchise arrangements and will focus primarily in
areas of the world where Precision Tune Auto Care already has developed a
presence, namely Southeast Asia, the Americas, and the Caribbean.
Management believes that the availability of two new franchise products to
offer existing franchisees could result in significant franchise sales as those
franchisees seek to obtain incremental market penetration and revenue growth by
complementing existing centers with one or more of the other types of centers.
To simplify the process of starting a new franchise or adding an additional
franchise, the Company presently intends to initiate two new programs:
(Bullet) The Precision Asset Leasing Program will be intended to minimize
the up-front cash investment required by the franchisee. This
program will provide franchisees the opportunity to lease the
equipment required for operation of a Precision Tune Auto Care or
Precision Auto Wash center, as well as the building and equipment
required for a Precision Lube Express center.
(Bullet) The Precision Turnkey Program will be designed to allow a
franchisee to purchase an existing company-operated center and
will be offered at management's discretion in certain
predetermined areas. The franchisee will purchase a franchise
license and the center's assets, including goodwill, and, if
applicable, will rent the underlying real property from the
Company. The program is designed to enhance franchise sales by
providing readily available and immediately operational sites of
Company-selected locations.
Acquisition or Conversion of Competitor Centers. The Company aggressively
will seek to acquire or convert competitors, directly or through franchising, to
the Precision Auto Care system. Because the car wash industry is dominated by
one-to-three center operators, this business will be a particular focus for this
strategy. Management estimates that approximately 2,000 of the existing car wash
centers in the United States use equipment similar to the equipment that will be
used in Precision Auto Wash centers. The Company believes that significant sales
increases could be achieved upon the acquisition or conversion of such centers
once they are upgraded to Precision Auto Wash operating and marketing standards
and enjoy the competitive advantages of the comprehensive and proprietary
Precision Auto Wash system and Precision brand name awareness. A number of
competing auto care and fast lube chains will also be targeted for acquisition
or conversion.
Company Store Division. The Company plans to develop a division of Company
owned Precision Tune Auto Care, Precision Auto Wash, and Precision Lube Express
centers. This will enable the Company to capture revenue and profits at the
service center operating level, increase Precision brand market share and
potentially derive capital gains through the subsequent sale and franchising of
such units pursuant to the Precision Turnkey Program. At June 30, 1997 this
division included 31 auto wash centers owned directly by the Company, 4 auto
wash centers which the Company manages and in which it holds a 50% equity
interest and four fast oil change and lube centers. Future development efforts
will initially focus principally on Precision Auto Wash and Precision Lube
Express centers targeted in the Colorado and Ohio regions in order to take
advantage of the base of existing operations.
Manufacturing and Distribution. In addition to providing its franchisees
with superior service and support, manufacturing and distribution activities
also generate significant revenue and operating profits for the Company.
Furthermore, these activities are designed to allow the Company to promote
uniform quality across its franchised locations. Precision Tune Auto Care
distributes parts and equipment to Precision Tune Auto Care centers through its
warehouse distribution division. The Company manufactures and installs the
HydroSpray equipment and operating system required to operate a Precision Auto
Wash franchise and also offers chemicals, parts and supplies to franchisees. The
Company manufactures and installs the prefabricated buildings from which
Precision Lube Express operations are conducted. The Company believes that the
HydroSpray equipment and prefabricated building operations will provide the
Company with significant cost advantages in connection with its acquisition and
conversion of competitor operated centers by allowing the Company to more easily
and economically upgrade the acquired facilities.
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OPERATIONS
PRECISION TUNE AUTO CARE
Precision Tune Auto Care is an automotive service specialist engaged in the
business of providing quality automobile maintenance services. At June 30, 1997
these services were provided at 556 Precision Tune Auto Care centers owned and
operated by Precision Tune Auto Care franchisees. The automotive maintenance
services provided by Precision Tune Auto Care centers include the diagnosis,
maintenance and repair of ignition systems, fuel systems, computerized engine
control systems, cooling systems, starting/charging systems, emissions control
systems, engine drive train systems, electrical systems, air conditioning
systems, oil and other fluid systems, and brake systems. Precision Tune Auto
Care believes it is a leading provider of automotive maintenance services in the
United States, that it enjoys a reputation for providing quality service quickly
and conveniently for a fair price and that it has benefitted from the growth in
the "do-it-for-me" versus the "do-it-yourself" market. For the year ended June
30, 1997, Precision Tune Auto Care system-wide retail sales, and the Company's
franchising revenues derived from the Precision Tune Auto Care system were
$207.7 million and $15.6 million, respectively.
Prototype Center. The prototype Precision Tune Auto Care center typically
is free-standing and currently consists of six to eight service bays, two to
four of which are drive-through and include pits to facilitate fast oil change
and lubrication services. Approximately 33% of the Company's existing domestic
Precision Tune Auto Care centers have at least six bays. The center also
includes storage space for parts and inventory, a manager's office, a
fully-furnished customer service and reception area, and restrooms. An optional
children's play area can be added to make the center more family friendly. The
center is located on a 15,000 to 20,000 square foot lot, generally in a high
traffic, commercial area. Each center is identified with Precision Tune Auto
Care signage, including the Precision Tune Auto Care logo and trade dress, to
create a consistent image and heightened customer recognition. Precision Tune
Auto Care Centers are generally open six days a week from 8:00 a.m. until 6:00
p.m. Each center maintains an inventory of over 3,000 SKU's, including oil and
other automotive fluids, having an aggregate average value of approximately
$15,000. The design and operation of each center is intended to provide the
customer with a superior experience by offering the customer high quality
services quickly in clean, well-run facilities. Exclusive of real estate, the
estimated initial investment to open a prototype Precision Tune Auto Care center
ranges from $130,000 to $200,000.
Existing centers presently consist of between two and fourteen bays. All
centers are required to provide oil change and lubrication services (unless
otherwise restricted under the terms of a lease); however, a substantial number
of existing centers do not have drive through capabilities. For those existing
centers not currently able to offer fast oil change and lube services, the
Company believes that the modular system offered by Precision Lube Express will
present an excellent opportunity to penetrate this market segment and increase
revenue and earnings for franchisees who are able to locate a Precision Lube
Express center on their existing site or on a site in close proximity to their
Precision Tune Auto Care operation. Franchisees typically develop Precision Tune
Auto Care centers either by entering into a build to suit lease, under which the
landlord constructs the center and leases it to the franchisee, or by purchasing
land and building the facility.
Precision Tune Auto Care seeks half-acre sites in commercial areas which
have a minimum of 50,000 people within a five mile radius and 24-hour drive-by
traffic of at least 20,000 cars. In addition, the Company aims to cluster
existing markets before opening centers in markets where Precision Tune Auto
Care has no presence in order to create and take advantage of advertising
efficiencies. The Company actively assists franchisees with site selection and
evaluation of the proposed site, after which the Company has the right to reject
sites selected by franchisees.
Retail Marketing. Precision Tune Auto Care's marketing objectives at the
retail level are to increase sales penetration, enhance first time customers'
trial experience, and bolster customer retention efforts. To further these
objectives, Precision Tune Auto Care has developed and implemented a
comprehensive marketing plan containing numerous programs and materials for use
by Precision Tune Auto Care centers. The plan includes targeted marketing
programs designed to reach key market segments, in-store merchandising materials
designed to enhance retail sales and first time customer trials, and other local
marketing materials (e.g., second car discounts, service reminder cards, and ATM
receipt coupons) designed to generate first time customer trials and improve
customer retention. The Company's current data base includes approximately three
million names. The Company uses this data to analyze services provided by
Precision Tune Auto Care centers. Moreover, franchisees can access the data for
the purpose of issuing service reminder notices and other promotional purposes.
Precision Tune Auto Care, in conjunction with an advertising cooperative funded
by franchisees, provides a variety of marketing materials to franchisees,
including television and radio commercials, newspaper, direct mail material, and
instore promotional material. In addition, a number of sales promotion program
packages, including grand opening, anniversary and peak season promotional
packages, have been developed. Precision Tune Auto Care recently introduced a
marketing campaign designed
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to enhance awareness of the variety of Precision Tune Auto Care services and to
establish Precision Tune Auto Care as the convenient and cost-effective
alternative to the new car dealer for automotive maintenance. The Company has
also recently initiated a fleet service program pursuant to which the Company
services automotive fleets at volume discounts.
Training and Operational Support. A significant element of Precision Tune
Auto Care's commitment to quality service is its intensive training program for
franchisees. Franchisees are required to successfully complete 80 hours of
initial training prior to opening their centers. This training runs for two
weeks at the Company's national training center in Leesburg, Virginia. The
Company also offers a full line of technical training, including courses on
engine performance, fuel systems and emissions, automotive electronics, fuel
injection, and brake certification. These courses, which consist of between 40
and 80 hours of classroom and hands-on training, are designed to allow
franchisees and service center technicians to maintain and update their
technical capability to service today's more technically complex vehicles. In
addition to classes conducted at the Company's national training headquarters,
Precision Tune Auto Care offers a program through which trainers are available
to franchisees onsite. Generally, area subfranchisors also are required to
maintain a training facility and have one certified trainer on staff to provide
local technical training and certification. Upon opening a new center, training
crews are onsite for at least the first two business days.
The Company has designed a policies and procedures manual to simplify the
management and operational challenges faced by a franchisee, maximize the
franchisee's revenue and earnings, and provide a consistent customer experience
throughout the Precision Tune Auto Care system. Each center in the system
receives an evaluation utilizing a standard evaluation report on a quarterly
basis and shorter monthly visitation reports by an operations manager employed
by the Company or an area subfranchisor as appropriate. Recent management
initiatives have also included the retention of an independent service to
"mystery shop" approximately one-third of Precision Tune Auto Care centers each
year.
Management also has developed the Precision Information Network ("PIN"), a
proprietary point of sale computer system, and has made this system available to
franchisees. This Windows-based system employs touch-screen technology designed
to be user friendly. The PIN or a similar system is required to be used under
current franchise agreements. Reports provided by the PIN system include
productivity, cost of goods, labor, inventory and product class. In addition,
PIN contains a marketing database module that facilitates the tracking of
customer information for the development of direct mail marketing campaigns and
other marketing strategies. Remote-location polling of information and
electronic ordering from the Company's parts and equipment division are features
currently under development. Upon completion of the Offering each center will
receive up to $2,500 to upgrade its existing computer system to PIN or to
install a PIN system if the center does not already have a computer system.
Franchise Marketing. Precision Tune Auto Care has been engaged in
franchising Precision Tune Auto Care centers since 1977. The Company has a
comprehensive franchise sales process that starts with the placement of
advertising in appropriate franchise and business publications. The Company also
maintains a home page on the Internet through which interested parties may
submit a franchise inquiry. Prospective franchisees are asked to complete a
Confidential Qualifications Report which serves as the initial screen to
determine whether a prospect is qualified. The Company seeks individuals with
management experience who will commit full time to the operation of their
franchise and who have a minimum of $50,000 and $150,000 in liquid assets and
net worth, respectively. Franchise sales seminars are conducted on a regular
basis at the corporate office and provide qualified prospective franchisees with
the opportunity to investigate the franchise arrangements thoroughly in
connection with their decision to become a franchisee.
Precision Tune Auto Care's area development system has played a major role
in the Company's franchise development efforts. Under this system, Precision
Tune Auto Care has entered into area development agreements that grant area
developers the right and obligation to develop franchises on Precision Tune Auto
Care's behalf within specific geographic regions for stated periods of time.
Franchise agreements within the area are between Precision Tune Auto Care and
the franchisee. The area developer typically receives up to one-half of the
initial franchise fee, one-half of the subsequent royalty revenues and one-half
of franchise renewal and transfer fees. After the creation of a franchise, the
area developer performs some or all of Precision Tune Auto Care's franchisor
obligations. The Company is free to establish and operate Company-owned centers
in areas in which it has granted development rights to area developers. In that
event the Company is required to pay the area developer amounts equal to the
royalty payments that the area developer would otherwise receive if the center
was being operated by a franchisee. As of June 30, 1997, 32 area developers had
an ownership interest in a total of 169 Precision Tune Auto Care centers and
provided support to another 336 centers.
The map below reflects territories within the United States that are
presently covered by area development agreements.
[MAP TO BE SUPPLIED]
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Open Area Development. Precision Tune Auto Care's current strategy is to
pursue aggressively the direct development of open areas in which area
developers have not been granted rights. To facilitate this strategy, Precision
Tune Auto Care has implemented an open area development plan that is supported
by a devoted franchise development team on the corporate payroll. This plan
addresses such factors as market demographics, development resources (e.g.,
advertising and public relations vehicles, developers of commercial real
estate), criteria for initial center development, and criteria for additional
center development. Based on these factors, a specific expansion strategy for
each target area has been developed. The Company believes that significant
expansion potential exists in areas not controlled currently by area developers.
PRECISION AUTO WASH
Precision Auto Wash operates 34 Company-owned touchless automatic and
self-service car wash centers. The Company owns 30 of these centers and manages
and holds a 50% interest in the remaining four. The Company intends to commence
the sale of Precision Auto Wash franchises promptly following the Combination
and after the Company complies with applicable state franchise filing and other
regulations.
The Company believes that touchless automatic and self-service car washes
present the following significant competitive advantages relative to other
sectors of the car wash industry:
(Bullet) Price: According to studies commissioned in 1996 by the
Professional Carwashing and Detailing Magazine, the average cost
of a basic in-bay automatic wash was $3.40 as compared to $5.98
for an exterior-only cloth wash and $9.28 for a full-service
tunnel wash. The Company prices its in-bay automatic car washes
competitively based on regional and other prevailing market
conditions.
(Bullet) Convenience: Self-service and touchless automatic washes are open
24 hours per day, 365 days per year as opposed to exterior-only
cloth washes and full service tunnels which typically are open
8-10 hours per day and are closed on holidays.
(Bullet) Capital investment: The capital investment required to build a
self-service and touchless automatic wash is significantly lower
than that required for full service tunnel and exterior-only cloth
washes.
(Bullet) Labor: Self-service and touchless automatic washes do not require
the same level of labor required to operate other types of washes.
(Bullet) No-touch operation: Recent advances in chemical technology allow a
self-service or touchless automatic car wash to provide a
high-quality wash without friction, which lowers the risk of
vehicle damage.
These factors are the driving forces behind management's belief fact that
touchless automatic and self-service car wash systems are the fastest growing
segment of the car wash industry.
Precision Auto Wash has developed a system that management believes
represents the state-of-the-art in modern touchless automatic and self-service
car washing capabilities. Substantially all Precision Auto Wash centers will
feature HydroSpray equipment and the proprietary operating system developed by
the Precision Auto Wash Constituent Companies. The Company believes that both
the HydroSpray equipment and the proprietary operating system are superior to
the technologies utilized by its competitors and, therefore, provide the Company
with a significant competitive advantage.
This operating system includes the following features:
(Bullet) Total computerized control of the wash system which allows the
operator to change time cycles and equipment functions, and to
monitor the status of operations, quickly, easily and
cost-effectively, even from a remote location on a laptop personal
computer.
(Bullet) The ability for customers to quickly and easily contact a central
national customer help center on a dedicated toll-free number in
the event of an equipment malfunction, and for the help center to
immediately rectify such problem on-line.
(Bullet) A frequent wash card system, utilizing bar-code technology,
rewards customers with free washes based upon wash frequency.
(Bullet) Through its exclusive integrated voice, LED display and video
instruction features, the system provides the customer with an
understanding of how to operate the system.
(Bullet) A grace period feature permits the customer to continue the wash
cycle by inserting one or more quarters after his or her initial
time has expired.
(Bullet) A bonus time feature allows customers more time per coin during
off-peak hours.
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The system also includes several important mechanical features which
provide the motorist with a superior car wash. In the automatic bay, the
HydroSpray unit travels around the vehicle in a heated, galvanized track
enabling the car wash to be open 24 hours a day, even during the coldest times
of the year. Three rotating wands and 8 high pressure nozzles continuously sweep
dirt and grime from the vehicle. Each wash is finished with a spot-free rinse.
In the self-service bay, the customer controls the entire wash process by means
of a wash wand and foaming brush system. Many motorists prefer self-service car
washing because they maintain total control over the entire wash process and the
amount of money they spend. Utilized properly, the self-serve wash produces
results similar to those of the automatic wash. Because the system is operated
by a completely integrated computer control system, the foregoing features may
be modified and tailored to each specific location, depending on customer needs
and market conditions.
Centers will include powerful vacuums that deliver maximum cleaning power
and feature clear, graphic instructions. A timer offers a "Last Coin Alert,"
"Extra-Time" service, and a "Count-Down" display of time remaining. All
Precision Auto Wash centers will also offer a complete line of auxiliary vending
items such as towels, wet towels and Armor All(Register mark). Depending on
market conditions and requirements, other services may be offered as well such
as fragrance-dispensing machines and carpet shampooers.
The Company intends to use approximately $1.5 million in borrowings under a
credit facility and internally generated operating funds to outfit all of the 34
Company-operated centers with the full complement of HydroSpray equipment,
proprietary operating and marketing features of the Precision Auto Wash system,
and the Precision brand signage. The Company expects to complete this conversion
within 18 months of the consummation of the Offering.
Precision Auto Wash will aggressively pursue new market development. Its
strategies will focus on acquiring and upgrading existing car wash facilities in
selected markets, developing Company-owned centers, and marketing both existing
and new centers to franchisees. Targeted markets will be selected based on the
presence of suitable car wash facilities and existing centers controlled by
Precision Auto Wash. Development efforts initially will be focused on clustering
in Colorado and Ohio markets, where Precision Auto Wash facilities already
exist. Management believes that the highly-fragmented car wash market is ripe
for consolidation, and that the Company's ability to upgrade acquired washes to
Precision Auto Wash standards at wholesale prices through its HydroSpray
equipment division represents a significant competitive advantage.
Prototype Center. An auto wash center prototype was developed in 1995 in
Aurora, Colorado to demonstrate that a self-service car wash could gain
significant market share through sound marketing and operating practices. This
center contains 5 self-service and one automatic car wash bays. Exclusive of
real estate, the estimated initial investment to open a Precision Auto Wash
prototype center ranges from $210,000 to $235,000.
Precision Auto Wash centers are generally located on half-acre sites in
high-traffic, commercial areas.
Retail Marketing. The Company believes that Precision Auto Wash should
enjoy significant benefits from the Precision Tune Auto Care national marketing
program. In addition, retail sales should be stimulated by the name recognition
and cross marketing opportunities generated through Precision Auto Wash's
association with the Precision Tune Auto Care and Precision Lube Express
systems.
At present, marketing initiatives at the retail level include (i) a grand
opening ceremony to publicize the opening of each new center, (ii) frequent
usage/swipe card system to encourage repeat business, (iii) direct mail
marketing, (iv) quarterly newsletter publication and distribution to customers,
(v) advertising on the back of grocery store receipts, (vi) customer
appreciation days, and (vii) fleet account solicitation.
Training and Operational Support. A three-day formal pre-opening training
program is required for all Precision Auto Wash franchisees prior to the opening
of a center.
Precision Auto Wash will provide its franchisees with an operations policy
and procedures manual, and perform a thorough center evaluation on a quarterly
basis. Precision Auto Wash centers will participate in "mystery shopper" and
customer service programs. Field operations, marketing and training support will
be provided by Company personnel.
Franchise Marketing. After the Offering, the Precision Auto Wash franchise
sales effort will be combined into and become part of the overall franchise
sales process for all three Precision-branded products. Therefore, prospective
Precision Auto Wash franchisees will be recruited and granted franchises in
accordance with the same processes and techniques that are used to recruit and
license prospective Precision Tune Auto Care franchisees. Precision Tune Auto
Care's area subfranchisors who agree to become a Precision Auto Wash area
subfranchisor in their territory will be paid a portion of the initial
franchisee fee and continuing royalty in consideration for assisting in the
development and ongoing support of a Precision Auto Wash center.
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Precision Auto Wash franchisees will be required to purchase the HydroSpray
equipment and operational system package from the Company.
PRECISION LUBE EXPRESS
Precision Lube Express owns and franchises "Lube Depot" centers, which
provide fast automobile oil change, lubrication, filter replacement and related
basic services. In addition, Precision Lube Express manufactures modular Lube
Express buildings that it will sell to franchisees and independent entities.
Precision Lube Express will also be an approved supplier of oil filters, air
filters, additives and tools used in franchised operations. Immediately after
the Offering, the Lube Depot name will be changed to Precision Lube Express and
all of the existing Lube Depot centers will be offered the opportunity to
convert to Precision Lube Express centers. The Company will pay all of the costs
incident to the conversion and estimates that this would cost approximately
$150,000 if all 24 centers converted. The Company will fund these costs from
internally generated funds or its revolving credit facility. The Company intends
to commence the sale of Precision Lube Express franchises promptly following the
Combination and after the Company complies with applicable state franchise
filing and other regulations.
The "above-ground" configuration of the modular Lube Express building
manufactured and sold by the Company enables Precision Lube Express operators to
commence operations more quickly and with lower levels of initial investment
than many of its competitors. Unlike traditionally constructed fast oil change
and lube centers, the Company's modular centers can be relocated or expanded
quickly. In addition, the modular Lube Express building can be located on a
relatively small piece of property. Unlike certain of its competitors, Precision
Lube Express centers do not perform transmission and differential fluid changes,
radiator flushes or other automotive maintenance or repair work. Accordingly,
the Company believes that this enables Precision Lube Express operators to
provide services more inexpensively than their competitors because Precision
Lube Express operations require less skilled labor.
The Company also believes that the Precision Lube Express operations can be
combined with Precision Auto Wash and Precision Tune Auto Care centers to gain
competitive advantages associated with being a one-stop retail shop and the
benefits associated with operating under the "Precision" brand name. Because the
Precision Lube Express building is modular and relatively small, it can be
located on the same site as a Precision Auto Wash or Precision Tune Auto Care
center, or on other retail locations as well.
The Company has conducted discussions with the Precision Tune Auto Care
franchise owners association concerning the potential conflict between the oil
and lube services provided by existing Precision Tune Auto Care centers and
potential new Precision Lube Express centers. The Company has agreed to use its
best efforts to avoid such conflicts by only developing Precision Lube Express
centers after studying the existing trade areas of potentially impacted
Precision Tune Auto Care centers.
At June 30, 1997, there were 21 Lube Depot centers in operation. These
franchises are located in Ohio, Pennsylvania, Iowa, Delaware, Kentucky,
Illinois, Indiana, and West Virginia.
Prototype Center. The prototype Precision Lube Express Center consists of a
one or two bay unit which provides oil and filter replacement and chassis
lubrication services. Precision Lube Express centers also check and fill all
vital fluids, and conduct vehicle safety inspections, including inspection of
exhaust systems, tires and chassis parts. Precision Lube Express customers may
also purchase air filters, PCV valves, breather filters, wiper blades and
assorted engine additives. Precision Lube Express centers top off vital fluids
between customer's oil changes at no charge. Exclusive of land, the estimated
initial investment to open a Precision Lube Express prototype Center ranges from
$134,000 to $246,000.
Retail Marketing. Precision Lube Express marketing emphasizes the basic
"hassle-free" fast oil change and lube services Precision Lube Express provides.
Precision Lube Express believes it can compete effectively with other fast lube
regional and national chains because the basic nature of its services minimizes
the amount of services and accessories that may be sold and added to a
customer's invoice. In addition, retail sales are expected to benefit from the
name recognition and cross marketing opportunities generated through Precision
Lube Express' association with other Precision Auto Care brands.
Specific marketing initiatives at the retail level include (i) VIP cards,
granting customers special rates and other benefits, (ii) point-of-sale
marketing materials, including frequent usage cards that provide customers with
free oil changes to encourage repeat business, (iii) radio and print media
advertising, and (iv) direct mail marketing.
After the Offering, Precision Lube Express will expand its existing local
fleet marketing efforts by tapping into the Precision Tune Auto Care national
fleet marketing program.
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Training and Operational Support. Precision Lube Express provides a
one-week training program that franchisees will be required to complete
successfully before opening a Precision Lube Express center. The program will
address the following areas: computer system operations, lubrication equipment
training, center operations, customer service, and advertising.
Each Precision Lube Express franchisee is provided with an operations
policy and procedures manual. In addition, each center will receive operational
visits similar to Precision Tune Auto Care centers and will be included in
mystery shopper and customer service programs. Field operations, marketing and
training support will be provided using the existing Precision Tune Auto Care
structure, with area subfranchisor personnel or corporate personnel, as
applicable.
Franchise Marketing. After the Offering, the Precision Lube Express
franchise sales effort will be combined into and become part of the overall
franchise sales process for all three Precision-branded products. Therefore,
prospective Precision Lube Express franchisees will be recruited and granted
franchises in accordance with the same processes and techniques that are used to
recruit and license prospective Precision Tune Auto Care franchisees. In areas
where Precision Tune Auto Care has an area developer, those area developers will
be offered the opportunity to enter into a Precision Lube Express development
schedule or the Company will develop Precision Lube Express centers in those
areas directly. Lube Depot currently has agreements in place covering the
development of areas including territories in the states of Arizona, California,
Delaware, Maryland, Nevada, New Jersey, Ohio, Oregon, Pennsylvania, Washington
and West Virginia. Upon consummation of the Combination, Lube Depot's prior
practice of selling territories to area developers will be discontinued.
MANUFACTURING AND DISTRIBUTION
The Company's manufacturing and distribution account for a significant
portion of the Company's revenues and are more fully described below. The
Company does not rely heavily on any single supplier for the supply of any
materials, such as oil, equipment or raw materials or components the Company
utilizes in its manufacturing operations.
Precision Tune Auto Care. Precision Automotive Components ("PAC"), a
distributor of automotive parts and equipment located in Winchester, Virginia,
has been an integral part of the Precision Tune Auto Care system since its
inception. PAC sells a complete line of quality ignition parts, oil and air
filters, brake parts, diagnostic equipment, signage, and other items necessary
and incidental to the outfitting and operation of Precision Tune Auto Care
centers. PAC carries an inventory of approximately 5,500 SKU's, many of which
are private labeled for the Precision brand. PAC provides two-day delivery to
centers anywhere in the United States. After the Combination, PAC will supply
oil and air filters, and other supplies, to Precision Lube Express centers and
will, over time, supply spare parts and other supplies to Precision Auto Wash
centers. PAC revenues totaled $11.8 million for the year ended June 30, 1997.
Precision Auto Wash. Hydro Spray Car Wash Equipment Co., Ltd.
("HydroSpray"), a Company subsidiary, manufactures, distributes and sells the
car wash equipment used in Precision Auto Wash centers. Management believes that
the HydroSpray equipment package is a leading car wash equipment package on the
market because it includes such unique features as an integrated computer system
that controls the auto wash system and allows remote dial-in access for system
status reports and the diagnosis of maintenance problems. HydroSpray will sell
equipment to Precision Auto Wash franchisees and to other third parties for
installation in car wash centers that are not franchised or otherwise affiliated
with Precision Auto Wash. HydroSpray revenues totaled $6.3 million for the year
ended June 30, 1997.
While the Company has a welding shop and fabricates some of its components
onsite, HydroSpray's operations principally include the assembly of parts that
have been manufactured by suppliers to HydroSpray specifications. This process
is conducted at HydroSpray's 40,000 square foot manufacturing facility located
in Cedar Falls, Iowa. The finished materials are generally constructed of
stainless steel and galvanized steel.
Miracle Chemicals blends and distributes the chemical solutions used in
Precision Auto Wash centers including the "Mean Green" presoak and other
solutions which are required in the Precision Auto Wash system. Miracle
Chemicals makes its chemicals and supplies available to Precision Auto Wash
franchisees and other third parties who are not franchisees or otherwise
affiliated with Precision Auto Wash. Miracle Chemical's revenues for the year
ended June 30, 1997 were $811,000.
Precision Lube Express. A modular building division manufactures and
installs the modular building and equipment system utilized by Precision Lube
Express centers. The Company also sells these buildings to others for various
commercial applications. The buildings are delivered, installed, field-tested,
and outfitted with all of the supplies and tools necessary to commence
operations immediately. Most installations are complete within three to five
business days from the date of shipment, thus providing competitive time and
cost advantages over traditional construction. This division produced $1.8
million in revenues for the year ended June 30, 1997.
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The Company conducts these manufacturing operations at a 27,000 square foot
facility located in Mansfield, Ohio. The Company purchases parts from
third-party suppliers which are manufactured to the Company's specifications.
Following the assembly of a steel subframe, an aluminum skin is attached to the
frame to form the exterior. Doors and windows are then installed together with
insulation, wiring, piping and other components. The buildings are finally spray
painted and shipped to customers for installation. The Company is not dependent
upon any single supplier and the parts and materials the Company uses in
connection with its manufacturing process can be obtained from a variety of
suppliers.
FRANCHISE ARRANGEMENTS
Precision Tune Auto Care. Precision Tune Auto Care has been engaged in
franchising Precision Tune Auto Care centers since 1977. Precision Tune Auto
Care enters into franchise agreements pursuant to which a franchisee is granted
the right to establish and operate a Precision Tune Auto Care center. As of June
30, 1997, substantially all of the Company's Precision Tune Auto Care centers
were owned and managed by franchisees. Precision Tune Auto Care's franchises
have been sold during the preceding years under franchise agreements that vary
in detail as the Precision Tune Auto Care's franchise program has evolved.
Currently, the Precision Tune Auto Care's standard form of franchise agreement
requires payment to Precision Tune Auto Care of an initial franchise fee of
$25,000 and a continuing royalty of 7.5% of weekly gross receipts (but not less
than $100 per week). In addition, the franchisee is required to spend 9% of
weekly gross receipts on advertising, 1.5% of which is paid into the national
advertising fund and 7.5% of which is spent locally. The current franchise
agreement has an initial term of ten years and provides for a number of five
year renewal options.
Under the terms of a program implemented recently by the Company, qualified
franchisees are eligible to have their royalty rate reduced to 6% if they
satisfy certain criteria. Under the program, franchisees are also provided with
an incentive to purchase additional Precision Tune Auto Care franchises. Any
franchisee who has owned and operated a center for at least one year in
accordance with this program will be charged an initial franchise fee of $15,000
for a second franchise and $10,000 for each additional franchise purchased,
rather than the standard initial franchise fee of $25,000.
Under its current form of franchise agreement, the Company has a continuing
obligation to provide technical and administrative support, supervisory
services, centralized advertising, and training and related support to its
franchisees. In certain regions, the Company has delegated these duties on area
developers under its area developer system.
Upon non-renewal and transfer, the Company has the first right to purchase
the operating assets and obtain an assignment of leased facilities in certain
cases. The Company occasionally repurchases franchise rights. The decision to
repurchase is made solely at the Company's discretion and is not a contractual
obligation. The Company also periodically obtains possession of some
franchisees' franchise rights by exchanging for such rights notes payable or
other consideration, or by exercising rights outlined in the Franchise
Agreements.
Precision Tune Auto Care also enters into master franchise agreements to
develop international markets. Generally, the master franchisee pays a license
fee and is required to develop Precision Tune Auto Care centers in accordance
with an agreed upon schedule within the defined area. Franchise agreements
within the area are between the master franchisee and the unit franchisee. The
master franchisee is required to perform all of the obligations of the
franchisor, and Precision Tune Auto Care generally receives 20% of the initial
franchise fee and up to one-third of ongoing royalty fees.
Precision Auto Wash. The Company intends to establish relationships with
Precision Auto Wash franchisees pursuant to the terms of a standard franchise
agreement. The Company expects that the terms of its standard franchise
agreement will call for the payment of an initial franchise fee of $20,000. The
initial franchise fee includes a $5,000 credit that may be applied towards parts
and supplies purchased from the Company. Franchisees will be required to pay
continuing royalties of 5% of weekly gross receipts (with a minimum of $50 per
week).
Franchisees will also be required to contribute an amount equal to 2% of
their monthly gross receipts to a national advertising fund and an additional
amount of their gross receipts royalties to a local advertising cooperative. In
addition, a franchisee will receive franchise protection within a specified
area. The Company expects that the franchise agreements will have an initial
term of ten years and provide for five-year renewal options.
Precision Lube Express. The Lube Depot franchise agreements currently in
effect have an initial ten-year term and may be renewed at the end of the
initial term for up to two additional five-year terms. Under the agreements, the
franchisee agrees to pay a royalty rate of between 3% and 5% of retail sales
generated by the franchise. Some franchisees currently pay a flat fee of between
$400 and $600 per month in lieu of a percentage royalty. The current franchise
agreements also called for the franchisee to pay an initial franchisee fee of
$10,000. The Company expects that the standard franchise agreement Precision
Lube Express will employ after the Combination will call for the payment of an
initial franchise fee of $12,500. Franchisees
43
<PAGE>
will be required to pay continuing royalties of 5% of weekly gross receipts
(with a minimum of $25 per week). Franchisees also will be required to
contribute an amount equal to 2% of their monthly gross receipts to a national
advertising fund and an additional amount of their gross receipts royalties to a
local advertising cooperative. The Company expects that the franchise agreements
will have an initial term of ten years and provide for five-year renewal
options.
The Precision Lube Express Constituent Company has entered into area
representative agreements which provide for the licensing of individuals and
entities to serve as area representatives and to assist with promotion,
marketing and the sale of centers within a particular territory. Area
representatives have the right to construct, own and operate franchise centers
within their territories. Precision Lube Express has granted area rights in
Arizona, California, Delaware, Maryland, Nevada, New Jersey, Ohio, Oregon,
Pennsylvania, Washington and West Virginia.
COMPETITION
The Company encounters competition in all aspects of its business,
including the sale by Precision Tune Auto Care, Precision Auto Wash and
Precision Lube Express centers of automotive maintenance and repair services,
self-service and automatic car wash services and fast oil and lubrication
services, respectively. The Company believes that automobile dealerships,
including recently emerging national and regional new and used auto dealerships,
represent Precision Tune Auto Care's principal competitors. Other Precision Tune
Auto Care competitors include tire companies and regional under-the-hood service
specialists. National competitors within Precision Tune Auto Care's market
include Sears Auto Center and the automotive maintenance centers operated by
Goodyear, Firestone and Penske, among others. Its regional competitors include
All Tune and Lube, EconoLube and Tune, Tunex, Tune-Up Masters and Speedy Oil
Change and Tune-Up, among others. The Company believes that the greater
technical complexity of today's vehicles provides a substantial barrier to entry
for competitors in the "under-the-hood" segment of the automotive maintenance
services industry.
Precision Auto Wash will compete not only with other self-service
automobile car washes but with car wash services provided by full-service
tunnels, exterior only tunnels, hand washes, oil company washes, and
do-it-yourself car washing.
Precision Lube Express also competes in the service segment of the
automotive aftermarket industry. According to the American Oil Change
Association, an estimated 650 million oil changes are performed annually in cars
and light trucks. These oil changes are performed by individuals (the
"do-it-yourself" market segment) or are performed professionally (the
"do-it-for-me" market segment). Professional oil changes are performed in all
types of automotive aftermarket outlets including fast oil change and
lubrication facilities such as those operated by the Company, car dealerships,
and gasoline stations. On a national level, Precision Lube Express will compete
with a number of major oil manufacturers dominating the fast lube market. These
include Pennzoil Company (Jiffy Lube International, Inc.), Quaker State Corp.
(Q-Lube Inc.), Valvoline Company/Ashland Oil Inc. (Instant Oil Change) and
Texaco Inc. (Express Lube), among others. In addition, Precision Lube Express
will compete with regional fast oil and lubrication operations including All
Tune and Lube (East Coast), EconoTune and Lube (West Coast), Tunex International
Inc. (Rocky Mountain region) and Speedee Oil Change and Tune-Up (Southern
region), among others.
The Company believes that the Precision Tune Auto Care, Precision Auto Wash
and Precision Lube Express centers will compete on the basis of customer
awareness through advertising, service, convenience and location and, to a
lesser extent, on price. The Company believes that the potential ability to
offer all of the services provided by each of the operations at one center or in
centers in close proximity to one another will be a significant competitive
advantage.
The Company's HydroSpray subsidiary competes with many other manufacturers
of self-service and touchless automatic car wash equipment manufacturers. Many
of these competitors are larger and well-established. The Company's competitors
include, but are not limited to, Mark VII Industries, Inc., Ryko, PDQ and many
smaller businesses. Some of these companies are well capitalized and have long
standing relationships with large oil companies who frequently purchase their
equipment for installation at car washes located on or adjacent to gasoline
stations.
TRADEMARKS
The Company has registered (subject to certain limited exceptions) a number
of trademarks and service marks with the United States Patent and Trademark
Office and has recently filed trademark and service mark applications with
respect to the names "Precision Tune Auto Care," "Precision Auto Wash" and
"Precision Lube Express." The Company's failure to obtain trademark and service
mark registration could have a material adverse effect on the Company's
operations. The Company has also registered and made application to register
trademarks in foreign countries where master franchise licenses have been
granted.
44
<PAGE>
GOVERNMENT REGULATION
As a franchisor, the Company must comply with regulations adopted by the
Federal Trade Commission (the "FTC") and with several state laws that regulate
the offer and sale of franchises. The Company also must comply with a number of
state laws that regulate certain substantive portions of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires that the Company furnish prospective
franchisees with a franchise offering circular containing information prescribed
by the FTC Rule. State laws that regulate the offer and sale of franchises
require the Company to register before the offer and sale of a franchise can be
made in that state.
State laws that regulate the franchisor-franchisee relationship presently
exist in a substantial number of states. Those laws regulate the franchise
relationship, for example, by requiring the franchisor to deal with its
franchisees in good faith, by prohibiting interference with the right to free
association among franchisees, and by regulating discrimination among
franchisees with respect to charges, royalties or fees. Those laws generally
also restrict a franchisor's rights with regard to the termination of a
franchise agreement by, first, requiring "good cause" to exist as a basis for
the termination; second, requiring the franchisor to give advance notice to the
franchisee of the termination; third, requiring the franchisor to provide the
franchisee with an opportunity to cure any default; and fourth, requiring the
franchisor to repurchase the franchisee's inventory or provide other
compensation. To date, those laws have not precluded the Company from seeking
franchisees in any given area and have not had a material adverse effect on the
Company's operations.
Precision Tune Auto Care centers and Precision Lube Express centers store
new oil and generate and handle large quantities of used automotive oils and
fluids. Precision Auto Wash centers utilize chemicals in the car wash process
which are then discharged in the waste water along with oils, fluids and other
chemicals washed off the vehicle. Accordingly, the Company and its franchisees
are subject to numerous federal, state and local environmental laws.
Non-compliance with such laws and regulations, especially with regard to leaks
in the Precision Tune Auto Care and Precision Lube Express centers' underground
storage tanks, could result in substantial costs. In its franchise agreements,
WE JAC requires its franchisees to comply with all applicable laws and
regulations. Certain states may also require the Precision Tune Auto Care,
Precision Auto Wash and Precision Lube Express centers to register or obtain a
license to perform certain services.
The Company believes it is presently in material compliance with applicable
federal, state and local environmental laws. The failure of the Company or its
franchisees to comply with any applicable laws, rules or regulations could have
a material adverse effect on the Company's business, financial condition and
operations.
PROPERTIES
The Company's corporate headquarters are located in approximately 24,000
square feet of leased office space in Leesburg, Virginia pursuant to a lease
that expires in 2002. The Company also leases 32,000 square feet in Winchester,
Virginia pursuant to a lease that expires in 2002. The Winchester facility
houses PAC, which warehouses the parts that are distributed to the Company's
Precision Tune Auto Care operation. The Company's annual rental obligations on
the headquarters and warehouse leases aggregate $311,500.
The Company conducts its HydroSpray car wash equipment manufacturing
operations from a 40,000 square foot Company-owned facility located in Cedar
Falls, Iowa. For information concerning the terms of this lease, see "The
Combination" and "Certain Transactions -- Real Estate Transactions."
The Company conducts its car wash chemical blending and distribution
operations from an 8,000 square foot Company-owned facility located in Columbus,
Ohio and operates its modular building manufacturing facility from a 27,000
square foot Company-owned building located in Mansfield, Ohio.
The Company believes that the three manufacturing facilities described
above will provide the Company with sufficient manufacturing capacity for the
foreseeable future.
The Company owns 30 of its Company-owned car wash centers and leases four
of its Company-owned car wash centers from unaffiliated third parties. The
Company made rental payments aggregating $40,000 with respect to the three
Company-owned centers it leases from unaffiliated third parties during the year
ended June 30, 1997. All four of the other Company-operated centers are owned by
the entities in which the Company holds 50% equity interest. In connection with
the Combination, the Company granted options to certain owners of Constituent
Companies to purchase properties from the Company at fair market value. In the
event such owners exercise their options, the Company will lease the properties
from such owners at fair market rental rates. For information concerning these
option and lease arrangements, see "The Combination" and "Certain
Transactions -- Real Estate Transactions."
45
<PAGE>
The Company also owns a small piece of property in Lake Charles, Louisiana
that previously had been the site of a Precision Tune Auto Care center.
EMPLOYEES
As of June 30, 1997, the Constituent Companies employed 165 full-time and
38 part-time employees in the aggregate. The Constituent Companies consider
their relations with their employees to be good. None of the Constituent
Companies' employees is covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to routine litigation in the
ordinary course of business, including contract, franchisee and
employment-related litigation. In the course of enforcing its rights under
existing and former franchise agreements, the Company is subject to complaints
and letters threatening litigation concerning the interpretation and application
of these agreements, particularly in the case of defaults and terminations. None
of these routine matters, individually or in the aggregate, are believed by the
Company to be material to its business or financial condition or results of
operations.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- ---- ------------------------------------------------------------------------------
<S> <C> <C>
Lynn E. Caruthers(1)(3) 45 Chairperson of the Board and Class III Director
John F. Ripley(1) 40 President, Chief Executive Officer and Class I Director
James A. Hay 41 Senior Vice President -- Retail Operations
Arnold Janofsky 54 Senior Vice President, Secretary & General Counsel
Peter Kendrick 43 Senior Vice President -- Finance and Treasurer
Grant G. Nicolai 50 Senior Vice President -- Franchise Development
William R. Klumb 39 Vice President -- Precision Auto Wash Operations and Class III Director
Woodley A. Allen(2) 50 Class II Director, Chairman of the Audit Committee
George Bavelis(1) 60 Class III Director
Bernard H. Clineburg(1) 48 Class III Director, Chairman of the Executive Committee
Clarence E. Deal 52 Class I Director
Effie Eliopulos 58 Class III Director
Bassam N. Ibrahim(3) 35 Class II Director
Richard O. Johnson(2) 69 Class I Director
Arthur Kellar(1)(3) 75 Class II Director, Chairman of the Organization and Compensation Committee
Harry G. Pappas, Jr.(2) 49 Class I Director
Gerald Zamensky 56 Class II Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Organization and Compensation Committee.
Precision Auto Care's officers are elected by and serve at the discretion
of the Board of Directors. Precision Auto Care's Board of Directors is divided
into three classes. Class I and Class II each consist of four members and Class
III consists of five members. At each annual shareholders meeting, directors of
one class are elected to three year terms. The terms of Messrs. Johnson, Deal,
Ripley and Pappas expire in 1998, Messrs. Zamensky, Kellar, Ibrahim and Allen in
1999 and Messrs. Bavelis, Klumb, Clineburg and Ms. Caruthers and Ms. Eliopulos
in 2000. See "Description of Capital Stock -- Anti-Takeover Provisions."
Lynn E. Caruthers was elected a member of the Board of Directors of WE JAC
in August 1991 and has served as Chairperson of the Board since September 1994.
She has been the general partner of Caruthers Properties, Ltd. of Arlington,
Virginia, a commercial real estate developer, for the past five years.
John F. Ripley has served as the President and Chief Executive Officer of
WE JAC and as a member of WE JAC's Board of Directors since July 1995. Mr.
Ripley was Chief Operating Officer of the Juvenile Justice Division of Youth
Services International, Inc. (YSI) from March 1994 to July 1995. He also served
as the Executive Vice President and Chief Financial Officer of YSI from January
1991 to September 1994. Mr. Ripley co-founded YSI and was instrumental in its
development and initial public offering. From March 1990 to January 1991, Mr.
Ripley was an independent financial planner with Chesapeake Financial Group,
Inc. in Ellicott City, Maryland. From August 1985 to March 1990, Mr. Ripley
served in various capacities at Jiffy Lube International, Inc., including Vice
President -- Eastern Division Retail Operations, Vice President and Corporate
Controller, and Director of Internal Audit. Mr. Ripley began his career with
Ernst & Young LLP in 1979.
47
<PAGE>
James A. Hay was named Senior Vice President of Retail Operations in April
1997. From 1993 until joining WE JAC, he was Chief Operating Officer with
Decorating Den Systems, Inc. Mr. Hay was Chief Executive Officer with Window
Works of Annapolis from 1987 to 1993. He also held positions with Window Works
International, Pepsi-Cola, Inc. and Procter and Gamble.
Arnold Janofsky joined WE JAC as Senior Vice President in October 1995.
From 1992 to September 1995, Mr. Janofsky was with The Structure Group,
specializing in franchise consulting. From 1981 to 1991, he was Vice President
and General Counsel of Jiffy Lube International, Inc.
Peter J. Kendrick was named Senior Vice President -- Finance in May 1997.
From 1995 until joining WE JAC, he was a principal with Corporate Finance of
Washington, a private investment banking firm serving companies in the
Washington metropolitan area. Mr. Kendrick was Vice President and Chief
Financial Officer with Capital Carousel, a closely-held wholesale distributor of
wall coverings and fabrics, from 1991 to 1995. Capital Carousel filed for
bankruptcy protection in 1995.
Grant G. Nicolai was named Senior Vice President-International Development
and Operations of WE JAC in October 1995. He previously served as Director of
International Development and Operations beginning in October 1994. Prior to his
employment with WE JAC, Mr. Nicolai was involved in international business
development for six years with LTV Aerospace and Defense, which later became
Vought Aircraft Company. In November 1988, he retired from the U.S. Air Force.
William R. Klumb has been President of Rocky Mountain I since its
incorporation in March 1987 and President of Rocky Mountain II since it was
incorporated in September 1988. In addition, Mr. Klumb has served as the
Managing Member of Ralston Car Wash since its formation in September 1991. From
March 1978 to April 1990, he was Vice President of W.H. Klumb Masonry, Inc., a
masonry contracting company he co-founded.
Woodley A. Allen became a member of WE JAC's Board of Directors in August
1991 and was elected Vice Chairman of the Board in April 1992. He has been
President of Allen Management Services, an Oakton, Virginia management
consulting firm, since May 1992. Mr. Allen was Chief Financial Officer of EZ
Communications, Inc. of Reston, Virginia from March 1973 to May 1992.
George Bavelis has served as the Chairman, President and Chief Executive
Officer of Pella Co., a corporation engaged in real estate development, since
1973. Mr. Bavelis has also served as the Chairman and President of Coin Op.
Vending Co., since 1983. Mr. Bavelis currently serves as a director of Heartland
Bancorp, First Family Bank and Sterling BancGroup. He has served as a director
of these financial institutions since 1988, 1992 and 1995, respectively.
Bernard H. Clineburg was elected a Director of WE JAC in October 1993.
Since October, 1990, he has been President, Chief Executive Officer and member
of the Boards of Directors of both The George Mason Bank of Fairfax, Virginia
and George Mason Bankshares, Inc. He also has served as Chairman of the Board of
George Mason Mortgage Corporation.
Clarence E. Deal has served as the President of Lube Ventures since
November 1994 and as President of Miracle Partners since 1988.
Effie Eliopulos has served as the Chairperson and Chief Executive Officer
of Miracle Industries, since 1991.
Bassam N. Ibrahim was elected a Director of WE JAC in October 1993. Mr.
Ibrahim has been an attorney with the Washington, D.C. law firm of Burns, Doane,
Sweeker & Mathis, LLP since August 1996. He was an attorney with the Washington,
D.C. law firm of Popham, Haik, Schnobrich & Kaufmann from June 1994 to August
1996. From June 1990 to June 1994, Mr. Ibrahim was an attorney with the
Washington, D.C. law firm of Mason, Fenwick & Lawrence.
Richard O. Johnson Mr. Johnson has been a director of Miracle Industries
since 199 . He also served as president of JJ-AGRO, Inc. a farming and farm
services business for the past 46 years. Mr. Johnson has been a director of
First Nations Bank of Zanesville since 1987. He has also served as a director of
National Gas and Oil Company since 1983 and Muskingum Livestock, Inc. since
1976.
Arthur Kellar has been a Director of WE JAC since August 1991 and served as
Chairman of the Board of Directors from April 1992 to September 1994. He also
has been Chairman of the Board of Directors of EZ Communications, Inc. of
Reston, Virginia for the past 25 years.
Harry G. Pappas, Jr. was elected a Director of WE JAC on February 28, 1996
and served as Chief Financial Officer from February 1997 to May 1997. From July
1992 to the present, Mr. Pappas has been the principal of Harry G. Pappas, Jr.
Consulting, specializing in financial consulting services to businesses and
business owners. Mr. Pappas acted as the Chief Financial Officer of Youth
Services International, Inc. from September 1994 to May 1995 and Chief Financial
Officer of
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Meridian Healthcare from July 1993 to May 1994. From February 1991 to July 1992,
he was Vice Chairman and Chief Financial Officer of MBNA Corporation, Newark,
Delaware. Prior to this, Mr. Pappas was Chief Financial Officer at both MNC
Financial, Inc. and Equitable Bancorporation, and was a partner with Ernst &
Young LLP.
Gerald Zamensky is currently a self-employed manufacturing consultant. From
1975 to 1995, Mr. Zamensky served as the President and Chief Executive Officer
of Southeastern Plastics, Inc., a company engaged in custom injection molding of
plastics.
The Board of Directors has standing Executive, Audit and Compensation
Committees. The Executive Committee has authority to take any action which could
be taken by the Board, except actions reserved for other committees or which may
be taken only by the full Board under law or Precision Auto Care's bylaws. The
Audit Committee will annually recommend to the Board the appointment of
independent certified public accountants as auditors for Precision Auto Care,
review the scope and fees of the annual audit and any special audit and review
the results with the auditors, review accounting practices and policies of
Precision Auto Care with the auditors, review the adequacy of the accounting and
financial controls of Precision Auto Care and submit recommendations to the
Board regarding oversight and compliance with accounting principles and legal
requirements. The Compensation Committee reviews and make recommendations to the
Board regarding salaries and benefits of executive officers and employees of
Precision Auto Care and administers Precision Auto Care's stock option and
employee stock purchase plans.
COMPENSATION OF DIRECTORS
Directors who attend Board of Directors' meetings in person will receive a
fee of $1,000 for each meeting attended. Directors attending telephonic board
meetings will receive a fee of $500 per meeting. Directors who attend committee
meetings will receive a fee of $200 per committee meeting attended.
In addition to the foregoing, the Board of Directors of WE JAC granted
options to purchase 10,000 shares of WE JAC Common Stock at an exercise price of
$10.00 per share to each of Lynn E. Caruthers, Woodley A. Allen, Bernard
Clineburg, Bassam N. Ibrahim, and Arthur Kellar on February 19, 1997. Options
with respect to 5,000 shares vested with respect to each such director at the
time of grant. The options with respect to the remaining 5,000 shares awarded to
each director are to vest upon the consummation of the Offering. In addition, WE
JAC granted Harry Pappas options to purchase 12,500 shares of WE JAC Common
Stock at an exercise price of $10.00 per share. Options with respect to 5,000
shares vested at the time of grant and options with respect to the remaining
7,500 shares awarded to Mr. Pappas are to vest upon the consummation of the
Offering. These options will be assumed by Precision Auto Care in connection
with the Combination.
The Company intends to grant each of Mr. Klumb and Ms. Eliopulos options to
purchase 12,500 shares of Common Stock effective at the closing of the
Combination. Such options will have an exercise price per share equal to the
initial offering price and one third of the options will vest on each of the
first three anniversary dates of the Combination.
EXECUTIVE COMPENSATION
General. Precision Auto Care was organized in April 1997, and its operation
since that time has related primarily to its formation and to the Combination.
The Company anticipates that during its fiscal year ending June 30, 1998 its
most highly compensated executive officers will be Messrs. Ripley, Hay,
Janofsky, Kendrick and Nicolai (the "Named Executive Officers"), each of whom
will be paid an annual salary of $200,000, $120,000, $120,000, $120,000 and
$120,000, respectively.
In addition to base salary, the Named Executive Officers will be eligible
to participate in bonus and incentive compensation plans as are from time to
time made available to senior executive officers of the Company. The Company
intends to grant options to purchase 20,000, 3,500, 20,000 and 12,500 shares of
the Company's Common Stock to Messrs. Hay, Janofsky, Kendrick and Nicolai,
respectively. These options, which shall be effective upon the closing of the
Combination and the Offering, will be granted pursuant to the Company's 1997
Stock Option Plan. Such options will have an exercise price per share equal to
the initial Offering price and one-third of the shares under each option will be
exercisable one year from the date of grant, another one-third will be
exercisable two years from the date of grant, and the final one-third will be
exercisable three years from the date of grant.
The table below sets forth the compensation earned and paid to each Named
Executive Officer who earned $100,000 or more during the periods presented. Each
such Named Executive Officer was employed by WE JAC during the periods.
49
<PAGE>
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ---------------------------------------------------- ---- --------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John F. Ripley(1) 1997 $ 181,734 $34,000 100,000
President and 1996 169,131 93,100
Chief Executive Officer 1995
Arnold Janofsky(2) 1997 117,269 9,646 4,000
Senior Vice President 1996 80,385 17,500
and General Counsel 1995
Grant G. Nicolai(3) 1997 110,809 8,577
Senior Vice President -- 1996 85,769 8,625
Franchise Development 1995 48,462
</TABLE>
- ---------------
(1) Mr. Ripley's employment with WE JAC commenced on July 1, 1995.
(2) Mr. Janofsky's employment with WE JAC commenced on October 1, 1995.
(3) Mr. Nicolai's employment with WE JAC commenced on September 11, 1995.
Option/SAR Grants in Last Fiscal Year. WE JAC is the only Constituent
Company that has a stock option plan or that otherwise granted stock options to
its executive officers during its last fiscal year. No SARs were granted to any
executive officer of any Constituent Company during its last fiscal year. The
following table sets forth certain information with respect to grants made by WE
JAC of stock options to Named Executive Officers who will be continuing as
executive officers of the Company pursuant to WE JAC's stock option plans. No
SARs were granted to executive officers during fiscal year 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION ------------------------
NAME GRANTED (1) FISCAL YEAR BASE PRICE DATE 5% 10%
- -------------------- ----------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John F. Ripley 100,000 75.7% $ 10.00 1/1/07 $629,000 $1,594,000
Arnold Janofsky 4,000 3% 10.00 1/29/07 25,160 63,760
Grant G. Nicolai -- -- -- -- -- --
James A. Hay 5,000 3.8% 10.00 4/22/07 31,450 79,700
</TABLE>
- ---------------
(1) The referenced stock options have an exercise price equal to the fair market
value of Common Stock on the date of grant as defined in the underlying
stock option plan, and become exercisable in three equal annual installments
commencing one year after the date of grant. Because WE JAC Common Stock is
not publicly or otherwise actively traded, the stock options plans require
the board of directors to determine the fair market value of WE JAC Common
Stock on the date of grant. Since WE JAC Common Stock is not publicly or
otherwise actively traded, there can be no assurance that the board of
directors' determination approximates the fair market value of WE JAC Common
Stock were such a trading market to develop.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values. The following table sets forth certain information with respect to the
exercise of stock options by WE JAC's named executive officers during fiscal
year 1997 and information concerning the number and value of unexercised stock
options at June 30, 1997. The value of unexercised stock options is based on the
Board of Directors determination that the fair market value of WE JAC Common
Stock was $10.00 on June 30, 1997. No stock options or SAR's were exercised
during the fiscal year ended June 30, 1997. As of June 30, 1997 no SARs were
outstanding.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF THE UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1997 JUNE 30, 1997
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John F. Ripley 31,033 162,067 $91,462 $ 182,927
Arnold Janofsky 5,833 15,667 10,208 20,417
Grant G. Nicolai 4,167 8,333 7,292 14,583
James A. Hay 5,000
</TABLE>
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<PAGE>
As of the closing of the Offering Mr. Ripley will hold options to purchase
193,100 shares of Common Stock (at a weighted average exercise price of $8.69),
Mr. Hay will hold options to purchase 5,000 shares of Common Stock (at an
exercise price of $10.00), Mr. Janofsky will hold options to purchase 21,500
shares of Common Stock (at a weighted average exercise price of $8.58),
Mr. Kendrick will hold options to purchase 5,000 shares of Common Stock
(at an exercise price of $10.00), and Mr. Nicolai will hold options to
purchase 12,500 shares of Common Stock (at a weighted average exercise
price of $8.25). These options result from the manner in which options
to purchase WE JAC common stock that were granted to such holders prior
to the Combination are to be converted into options to purchase the
Company's Common Stock in connection with to the Combination.
EMPLOYMENT ARRANGEMENTS
Mr. Ripley entered into an employment agreement with Precision Tune Auto
Care, Inc., WE JAC's principal operating subsidiary, pursuant to which Mr.
Ripley agreed to serve as Precision Tune Auto Care's President and Chief
Executive Officer for a period of three years commencing July 1, 1995. The
agreement also provides that Mr. Ripley will serve as a member of WE JAC's board
of directors. The agreement provides that Mr. Ripley will receive a base salary
of $200,000 per annum and a performance bonus of 10% of his base salary if the
corporation's before-tax net profits exceed $2,000,000. Mr. Ripley is provided
an additional bonus of 5% of his base salary for each $100,000 of before-tax net
profit over $2,000,000 earned by the Company up to a maximum of 50% of his base
salary during the fiscal year. Under the terms of the employment agreement, Mr.
Ripley is required to maintain the confidentiality of proprietary business or
technical information he obtains in the course of his employment with WE JAC,
and he is prohibited from competing with WE JAC in the United States during any
time he is performing duties for WE JAC and for a period of two years
thereafter. In the event Mr. Ripley's employment is terminated by WE JAC other
than for cause, or is terminated by Mr. Ripley for good reason, Mr. Ripley will
be entitled to receive a severance benefit equal to his base salary in effect at
the time of termination for the remainder of his initial term or 18 months,
whichever is greater, and will be entitled to receive any salary and benefits
accrued, vested or unpaid as of the date of termination. In the event of such
termination, Mr. Ripley also will be entitled to receive a pro rata portion of
his performance bonus. The Company intends to execute a new employment agreement
with Mr. Ripley containing terms substantially identical to the terms of his
agreement with WE JAC immediately following the closing of the Offering.
In connection with Mr. Ripley's employment, WE JAC granted to Mr. Ripley an
option to purchase an aggregate of 80,338 shares of WE JAC's common stock at an
exercise price of $7.05 per share, subject to antidilution adjustments. In
connection with the option agreement, WE JAC and Mr. Ripley also entered into an
agreement providing that in the event WE JAC issues any common stock or any
other securities convertible into or exercisable for common stock (other than
the issuance of common stock to employees pursuant to employee benefit plans),
Mr. Ripley shall be granted, at the time of such issuance, an option to purchase
such number of shares as will result in his having a right to purchase (pursuant
to outstanding options or otherwise) or holding as a result of the exercise, in
whole or in part, 5% of WE JAC's common stock, assuming the exercise or
conversion of all outstanding options, warrants or rights or similar securities
that are convertible into or exercisable for shares of common stock. This
agreement terminates upon the consummation of the Offering. Pursuant to this
antidilution agreement, Mr. Ripley has been awarded additional options as
follows: 7,920 for a private offering of 149,850 shares at a price of $8.00 per
share, and 4,842 for options awarded to board members and warrants issued to WE
JAC's commercial lender at a price of $10.00 per share.
On October 23, 1996, WE JAC awarded Mr. Ripley 100,000 additional options
to purchase WE JAC Common Stock at an exercise price of $10 per share. All of
the options are to vest on the date that the Combination is consummated. The
options will expire and will not vest in the event the Combination is not
consummated. For additional information concerning the options awarded to Mr.
Ripley and the manner and basis on which they will be converted into Common
Stock in the Combination, see "The Combination -- Interests of Certain Persons."
Each of Messrs. Hay, Janofsky, Kendrick and Nicolai have entered into
employment agreements to serve as senior vice presidents for a period of three
years commencing August 1, 1997. Mr. Klumb has entered into an employment
agreement to serve as a vice president for a period of three years commencing on
the date the Company successfully completes its initial public offering. The
agreements provide that each senior vice president will receive a base salary of
$120,000 per annum, Mr. Klumb will receive a base salary of $90,000 per annum,
and each of them will be entitled to receive a performance bonus under a plan to
be developed for all of the Company's senior vice presidents and vice
presidents, respectively. Under the terms of the each employment agreement, each
senior vice president and Mr. Klumb is required to maintain the confidentiality
of proprietary business or technical information obtained during the course of
employment with the Company. Each senior vice president is prohibited from
competing with the Company in the United States during the time he is employed
by
51
<PAGE>
the Company and for a period of two years thereafter. Mr. Klumb is prohibited
from competing with the Company in the United States during the time he is
employed by the Company and for a period of one year thereafter. In the event
any senior vice president's employment is terminated by the Company other than
for cause, or is terminated by the senior vice president for good reason, the
senior vice president will be entitled to receive a severance benefit equal to
18 months of base salary in effect at the time of termination and will be
entitled to receive any salary and benefits accrued, vested or unpaid as of the
date of termination as well as any other benefits to which the employee is
entitled under any benefit plan, policy or program maintained by the Company in
which the senior vice president participated. Mr. Klumb's agreement contains
substantially the same severance benefit upon termination of his employment by
the Company other than for cause, or by him for good reason as that received by
the senior vice presidents with the exception that his benefit will be equal to
12 months of his base salary in effect at the time of termination.
COMPENSATION PURSUANT TO PLANS
Stock Option Plans. As a result of the Combination, the Company has
reserved a total of 175,000 shares of Common Stock for issuance pursuant to the
WE JAC Stock Option Plan. This plan was established in August 1995 to provide
incentives to members of the Board of Directors of WE JAC and key employees to
expand and improve the profits and prosperity of WE JAC. The plan provides for
the grant of incentive stock options and non-qualified stock options. As of the
date of this Prospectus, all of the options available for grant under the plan
have been granted and are outstanding, and no options have been exercised. The
exercise price for each share under option is to be not less than the "fair
market value" of the Company's stock at the date of grant as determined in good
faith by the Company's Board of Directors upon the recommendation of the
Committee administering the plan. In determining the fair market value of WE
JAC's common stock at the date of grant, the Board of Directors considered a
number of factors including the financial condition and business prospects of
the Company and any advice solicited or received from outside advisors. All of
the options granted to date have exercise prices ranging from $8.00 to $10.00.
With respect to substantially all of the options currently granted, one-third of
the shares under each option are exercisable one year from the date of grant,
another one-third are exercisable two years from the date of grant, and the
final one-third are exercisable three years from the date of grant.
The Company has also adopted a 1997 Precision Auto Care Stock Option Plan
and has reserved 400,000 shares of Common Stock for issuance pursuant to this
plan. The terms of the 1997 Precision Auto Care Stock Option Plan are identical
in all material respects to the WE JAC Stock Option Plan.
1997 Employee Stock Purchase Plan. As a result of the Combination, the
Company has reserved a total of 20,000 shares of Common Stock for issuance
pursuant to the WE JAC 1997 Employee Stock Purchase Plan (the "Plan"). This Plan
was established to promote the long-term success of WE JAC by providing
employees of WE JAC the opportunity to become shareholders. The Plan commenced
on November 1, 1996. Employees who are participating in the Plan have until
October 31, 1997 to acquire the shares they had subscribed for at a purchase
price of 85% of the "fair market value" of WE JAC's common stock on the date of
grant, as determined in good faith by the Company's Board of Directors or by an
independent appraiser. Participating employees purchase the shares with amounts
they have contributed to the Plan through payroll deductions of up to 10% of the
employees base income, lump sum cash payments, or a combination of both. The
Board set the fair market value of common stock at the November 1 and February 1
grant dates at $8.00 per share and at the May 1 grant date at $10.00 per share.
The Plan has been fully subscribed by WE JAC's employees. The Plan provides that
the Company may repurchase any shares of common stock issued to an employee for
a period of 90 days following the employee's termination of employment. Any such
repurchases are to be made at the then current fair market value of WE JAC
common stock. The Company will assume these options in accordance with their
terms in connection with the Combination.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Company's Articles of Incorporation and Bylaws, the Company
is obligated to indemnify each of its directors and officers to the fullest
extent permitted by law with respect to all liability and losses suffered and
reasonable expenses incurred by such person in any action, suit or proceeding in
which such person was or is made or threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of the Company. The Company is obligated to pay the reasonable
expenses of the directors or officers incurred in defending such proceedings if
the indemnified party agrees to repay all amounts advanced by the Company if it
is ultimately determined that such indemnified party is not entitled to
indemnification. See "Description of Capital Stock -- Limitations on Liability
of Officers and Directors."
52
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth information regarding the beneficial ownership
of the Common Stock by (i) each person known to the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock, (ii) each
director and executive officer of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) each Selling Shareholder. Unless
otherwise indicated, each of the shareholders listed below has sole voting and
investment power with respect to the shares beneficially owned. The information
is presented as in effect immediately following the Combination.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING AFTER OFFERING
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
SHARES
NUMBER PERCENT OFFERED NUMBER PERCENT
---------- ------- ------- --------- -------
John F. Ripley(2)....................................................... 205,050 6.90 205,050 3.87
Lynn E. Caruthers(3).................................................... 135,381 4.85 135,381 2.65
James A. Hay............................................................ 0 0 0 0
Arnold Janofsky(4)...................................................... 7,794 * 7,794 *
Peter Kendrick.......................................................... 0 0 0 0
Grant G. Nicolai(5)..................................................... 11,919 * 11,919 *
William R. Klumb........................................................ 56,086 2.02 12,800 43,286 *
Woodley A. Allen(6)..................................................... 12,000 * 12,000 *
George Bavelis.......................................................... 97,398 3.50 97,398 1.91
Bernard H. Clineburg(7)................................................. 12,500 * 12,500 *
Clarence E. Deal........................................................ 205,167 7.38 205,167 4.02
Effie Eliopulos......................................................... 269,531 9.69 269,531 5.28
Bassam N. Ibrahim(8).................................................... 13,850 * 13,850 *
Richard O. Johnson...................................................... 57,590 2.07 57,590 1.13
Arthur Kellar(9)........................................................ 155,029 5.56 155,029 3.03
Harry G. Pappas, Jr.(10)................................................ 27,500 * 27,500 *
Gerald Zamensky(11)..................................................... 134,041 4.82 134,041 2.62
Summit Bank N.A......................................................... 21,760 * 21,760 0 0
Signet Bank N.A......................................................... 5,440 * 5,440 0 0
All directors and executive officers as a group (17 persons)............ 1,400,836 46.14 1,388,036 25.88
</TABLE>
- ---------------
* Represents less than 1%.
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Includes options to purchase 193,100 shares Mr. Ripley may exercise within
60 days of the Offering. The stockholder's address is 748 Miller Drive,
S.E., Leesburg, Virginia 20175.
(3) Includes 36,750 shares held by CARFAM Associates and 77,938 shares held by
Caruthers Properties, Ltd., limited partnerships in which Ms. Caruthers
holds limited partnership interests and options to purchase 10,000 shares
which Ms. Caruthers may exercise within 60 days of the Offering.
(4) Includes options to purchase 5,833 shares that are exercisable within 60
days of the Offering.
(5) Includes options to purchase 4,167 shares that are exercisable within 60
days of the Offering.
(6) Includes options to purchase 10,000 shares that are exercisable within 60
days of the Offering.
(7) Includes options to purchase 10,000 shares that are exercisable within 60
days of the Offering.
(8) Includes options to purchase 10,000 shares that are exercisable within 60
days of the Offering.
(9) Includes options to purchase 10,000 shares that are exercisable within 60
days of the Offering.
(10) Includes options to purchase 12,500 shares that are exercisable within 60
days of the Offering.
(11) Includes 47,731 shares held by Mr. Zamensky's spouse.
53
<PAGE>
THE COMBINATION
Simultaneously with, and as a condition to, the closing of the Offering,
the Company will consummate the Combination. The consideration to be paid by the
Company in the Combination will consist of shares of Common Stock, as set forth
in the Combination Agreement, which provides for the allocation of shares of
Common Stock among the Constituent Companies and their owners.
THE COMPANIES
The following description summarizes the business conducted by the Company
and each of the Constituent Companies.
The Company. The Company was formed in April 1997 solely for the purpose of
consummating the Combination. The Company has not conducted any operations and
has no material assets or liabilities.
WE JAC. WE JAC is the parent corporation of Precision Tune Auto Care, Inc.,
a Virginia corporation ("PTAC"). Precision Tune, an automotive service
specialist, has been engaged in the business of providing quality comprehensive
automobile maintenance services since 1976. At June 30, 1997, these services
were provided at 556 Precision Tune Auto Care centers owned and operated by
Precision Tune Auto Care franchisees. The automotive maintenance services
provided by Precision Tune Auto Care centers includes the diagnosis, maintenance
and repair of ignition systems, fuel systems, computerized engine control
systems, cooling systems, starting/charging systems, emissions control systems,
engine drive train systems, electrical systems, air conditioning systems, oil
and other fluid systems and brake systems. WE JAC derives a substantial portion
of its revenues from the distribution of automotive parts and equipment to
Precision Tune Auto Care centers and others. Another division of PTAC
distributes a complete line of quality ignition parts, oil and air filters,
brake parts, diagnostic equipment, signage and other items necessary and
incidental to the outfitting and operating of Precision Tune Auto Care centers.
Miracle Industries. Miracle Industries commenced operations in 1990 and is
involved in the manufacture, sale and distribution of car wash chemicals which
it sells directly and through a limited network of distributors. Miracle
Industries also owns and operates ten self-service car wash centers located
throughout central Ohio which facilities include in the aggregate 55
self-service bays and seven automatic bays. Each car wash center is supported by
self-serve vacuums, carpet shampooers and vending machines to provide additional
car wash accessories. In addition to operating its own car wash facilities,
Miracle Industries is actively engaged in the sale, service, and installation of
car wash facilities for third parties throughout Ohio. Miracle Industries owns
HydroSpray, which is a manufacturer of self-service and touchless automatic car
wash equipment. HydroSpray operates a manufacturing facility in Cedar Falls,
Iowa and sells and installs car wash equipment in the United States, Mexico and
Canada. HydroSpray is a successor to Don R. Havens Car Wash Systems which was
engaged in the manufacture of touchless car wash equipment since the mid-1980's.
Miracle Industries also owns a 50% interest in Indy Venture, L.L.C., an Indiana
limited liability company which owns and operates three car wash centers and one
Lube Depot fast oil change and lube centers in Indiana.
Lube Ventures. Lube Ventures commenced operations in 1994 and is engaged in
the manufacture of modular buildings specifically designed for the fast oil
change and lube business and in the sale of franchise rights to its "Lube Depot"
fast oil change and lube systems throughout the United States. Lube Ventures
markets its buildings to both franchisees and non-franchisees and utilizes the
buildings in its operation of three Company-owned stores. While the Lube
Ventures modular building is specifically designed for the oil change industry,
the company has made sales outside the oil change industry on a limited basis.
Lube Ventures operates one Company-owned Lube Depot centers and has franchised
26 Lube Depot centers.
Rocky Mountain I. Rocky Mountain I was founded in 1987 and owns and
operates one self-service car wash center in the Denver metropolitan area. This
car wash has seven self-service and one automatic bay and utilizes the
HydroSpray proprietary operating system. The site is usually staffed by one
attendant during specified business hours seven days a week.
Rocky Mountain II. Rocky Mountain II has been in operation since 1988.
Rocky Mountain II owns and operates seven self-service car wash centers in the
Denver metropolitan area. The Company operates an aggregate of 33 self-service
and 6 automatic bays. Three of the car wash sites utilize the HydroSpray
proprietary system and the remainder are operated through control systems
located at each car wash site. The HydroSpray system is being phased in at Rocky
Mountain II's other car wash sites and the Company intends to use a portion of
the net proceeds from the Offering to complete this upgrade following the
closing of the Combination.
Miracle Partners. Miracle Partners commenced operations in 1988 and owns
and operates five car wash centers in the State of Ohio. Miracle Partners is
currently operating 41 bays throughout its system, one of which is a completely
automated
54
<PAGE>
bay which utilizes the HydroSpray system and 40 of which are self-service car
wash bays. Miracle Partners also owns and operates a Lube Depot franchise and
leases property to a Lube Depot fast oil change and lube center franchisee.
Prema Properties. Prema Properties, which was founded in 1994, owns and
operates seven car wash centers in Ohio and owns a 50% equity interest in
another car wash it is responsible for operating. The centers are located
primarily in central Ohio and the Cleveland, Ohio area. The eight car wash
centers contain in the aggregate 47 self-service units and six automatic units.
Six of the automatic units have been installed within the last two years and all
of the automatic units include HydroSpray car wash equipment. At each of the car
wash sites, the company has vending equipment and self-serve vacuums to provide
additional services to the customer. Each of the car wash centers has a
part-time attendant assigned to it and the company utilizes area managers in
both the Cleveland area and in central Ohio. In addition to the company's car
wash operations, Prema Properties is the owner/operator of a Lube Depot
franchise unit located in Brookpark, Ohio.
Ralston Car Wash. Ralston Car Wash has owned and operated one self-service
car wash center in the Denver metropolitan area since 1990. The car wash
consists of 9 self-service and one automatic bay and the center utilizes the
HydroSpray proprietary operating system. The car wash is usually staffed by an
attendant during specified business hours seven days a week.
KBG. KBG does not conduct any operations and has been formed solely for the
purpose of conveying the computer software portion of the HydroSpray proprietary
operating system to the Company in the Combination.
COMBINATION PURCHASE PRICE
The Company will exchange in the Combination 2,780,695 shares of Common
Stock (valued at $30.6 million, based upon an assumed initial Offering price of
$11.00 per share) for all of the capital stock and membership interests in the
Constituent Companies. The Company plans to use approximately $18.5 million of
the net proceeds from the Offering to discharge certain outstanding indebtedness
of the Constituent Companies assumed by the Company in connection with the
Combination. Approximately 1,145,236 shares of Common Stock (valued at $12.6
million based upon an assumed initial Offering price of $11.00 per share) will
be delivered to owners of the Constituent Companies who are executive officers
or directors of the Company. As a result of the delivery of such shares and
shares such persons will be able to obtain upon the exercise of options which
will be exercisable within 60 days of the Combination, such persons will
beneficially own approximately 26.3% of the outstanding Common Stock immediately
following the Offering and deducting the shares of Common Stock offered by the
Selling Shareholders. See "Risk Factors -- Control by Management and Principal
Shareholders," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Certain Transactions" and "Shares Eligible for Future Sale" and the
Unaudited Pro Forma Combined Financial Statements appearing elsewhere in this
Prospectus.
The following table sets forth the shares of the Company's common stock to
be exchanged by the Company with the owners of each of the Constituent Companies
in the Combination:
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-----------------------------
<S> <C> <C> <C>
BEFORE AFTER
CONSTITUENT COMPANY SHARES OFFERING(1) OFFERING(1)(2)
- -------------------------------------------------------------------------------------- ---------- ----------- --------------
WE JAC Corporation.................................................................... 1,333,625 48.0% 26.6%
Miracle Industries, Inc............................................................... 749,250 26.9 14.7
Lube Ventures, Inc.................................................................... 169,168 6.1 3.3
Prema Properties, LLC................................................................. 148,889 5.4 2.9
Miracle Partners, Inc................................................................. 94,320 3.4 1.8
Rocky Mountain Ventures, Inc.......................................................... 64,223 2.3 1.3
Rocky Mountain Ventures II, Inc....................................................... 179,648 6.5 3.5
Ralston Car Wash, LLC................................................................. 29,161 1.0 0.6
KBG, LLC.............................................................................. 12,411 0.4 0.2
---------- ----------- --------------
Total............................................................................ 2,780,695 100.0% 55.0%
---------- ----------- --------------
---------- ----------- --------------
</TABLE>
- ---------------
(1) Does not give effect to the exercise of any options that will be held by
directors and officers of Precision Auto Care or 27,200 warrants for which
the Company has been notified will be exercised in connection with the sale
of shares of Common Stock being offered by certain Selling Shareholders.
(2) Assumes the Underwriters' over-allotment option is not exercised.
55
<PAGE>
The number and value of shares to be exchanged by the Company with respect
to each of the Constituent Companies, except WE JAC, was determined by
arm's-length negotiations between the Company and the representatives of the
respective Constituent Companies. The factors considered by the Company in
determining the consideration to be paid included, the historical operating
results, the net worth, the levels and types of indebtedness and the future
prospects of each of the Constituent Companies. The negotiations between WE JAC
and the Company were not arm's-length due to substantial overlap in management
of the Company and WE JAC at the time of such negotiation. However, because the
terms of all of the Combination Agreement value each Constituent Company in
relation to the value of each of the other Constituent Companies, the value of
WE JAC was subject to scrutiny by and negotiation with representatives of the
other Constituent Companies.
Upon consummation of the Combination, the Company will hold all of the
issued and outstanding shares of the capital stock and membership interests of
the Constituent Companies.
THE COMBINATION AGREEMENT
Common Stock
The shares of the Company's common stock issuable upon the closing of the
Combination to various owners of the Constituent Companies generally will be
freely tradeable without restrictions under the Securities Act except that
shares of the Company's Common Stock received by persons who are deemed to be
"affiliates" (as that term is defined in Rule 144 of the Securities Act) of a
Constituent Company may be resold by such affiliates only in transactions
permitted by the resale provisions of Rule 145 or as otherwise permitted under
the Securities Act. In addition, the terms of the Combination Agreement provide
that holders who receive in excess of 3,000 shares of the Company's Common Stock
pursuant to the Combination will be prohibited from selling or otherwise
disposing of the shares of the Company's Common Stock for value for a period of
180 days following the consummation of the Offering. The Company expects that
2,682,913 shares of the Company's Common Stock issued in the Combination will be
subject to this 180-day restriction. See "Shares Eligible for Future Sale."
Representations and Warranties of the Constituent Companies
The Combination Agreement contains customary representations and warranties
from each of the Constituent Companies relating to, among other things, the due
organization and good standing of each Constituent Company, a description of the
capital structure and equity ownership of the Constituent Company, the amount
and nature of the Constituent Company's contingent liabilities, the title to the
Constituent Company's assets, the insurance coverage maintained by each
Constituent Company, the accuracy of the Constituent Company's financial
statements, the status of litigation involving each Constituent Company, and
compliance with applicable laws.
Limited Escrow Arrangements
Indemnity Escrow. Pursuant to the Combination Agreement, the Company will
deposit into escrow at the Closing of the Combination 10% of the shares issuable
to each former owner of a Constituent Company (the "Indemnity Escrow Shares") in
order to satisfy claims it may have with respect to the breach of certain
representations, warranties and covenants made by such Constituent Company in
the Combination Agreement. Except in the case of fraud, the Company will not be
able to proceed against any owner individually in the event that the Company's
losses exceed the amounts represented by the Indemnity Escrow Shares. In the
event that the Company validly asserts a claim for indemnification against the
Indemnity Escrow Shares, the Company will be able to reacquire, liquidate and
retire Indemnity Escrow Shares of the former owners of a Constituent Company
with a value equal to the full amount of the damages, liabilities and expenses,
including reasonable attorney's fees, suffered or incurred by the Company as a
result of any such breach. The Company also will have the right to retire,
reacquire and liquidate Indemnity Escrow Shares if it suffers damages by reason
of any untrue statement of a material fact relating to the Constituent Company
or its owners that is contained in any preliminary prospectus, a registration
statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or any omission to state therein a material fact relating to
the Constituent Company or its owners required to be stated therein or necessary
to make such statements therein not misleading.
The number of Indemnity Escrow Shares the Company shall be entitled to
reacquire, liquidate and retire shall be equal to the amount determined by
dividing the amount of the damages, costs and expenses incurred by the Company
by the Initial Public Offering price. When the Company proceeds against
Indemnity Escrow Shares attributable to a Constituent Company the Indemnity
Escrow Shares of each former owner of that Constituent Company shall be
reacquired, liquidated and retired
56
<PAGE>
ratably. The Indemnity Escrow Shares will remain in escrow until the first
anniversary of closing or until any unresolved claim in respect of them has been
finally resolved in cases where a claim has been asserted by the Company prior
to the first anniversary of closing. Accordingly, each former owner of the
applicable Constituent Company shall receive his ratable portion of any
Indemnity Escrow Shares which remain in escrow on the first anniversary of
closing (or immediately following the time that a final determination has been
made with respect to such shares in the case of unresolved claims which have
been asserted by the Company prior to the first anniversary of closing).
Indebtedness Escrow. The Combination Agreement further provides that the
debt level of each Constituent Company will not exceed a specified level as of
the closing of the Combination. For purposes of the Combination Agreement, debt
means and includes all indebtedness of a Constituent Company for borrowed money,
capitalized lease obligations and guarantees of the obligations of others.
Pursuant to the Combination Agreement, the Company will deposit into escrow at
the Closing an additional 10% of the shares issuable to the owners of the
Constituent Companies at the Closing of the Combination (the "Indebtedness
Escrow Shares") in order to secure compliance with the maximum debt levels
allowed each of the Constituent Companies as of the closing of the Combination.
To the extent that the actual debt level of a Constituent Company exceeds the
specified debt level, the Company will have the right to reacquire, liquidate
and retire Indebtedness Escrow Shares having a value equal to the dollar amount
of the excess debt. Indebtedness Escrow Shares of the former owners of the
Constituent Company reacquired, liquidated or retired by the Company shall be
valued at the Offering Price. The table below sets forth the required debt level
for each Constituent Company.
<TABLE>
<CAPTION>
DEBT LEVEL AT REQUIRED DEBT LEVEL
CONSTITUENT COMPANY JUNE 30, 1997 AT CLOSING
- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C>
WE JAC $9,379,000 $10,600,000
Miracle Industries 4,218,000 4,810,000
Lube Ventures 1,301,000 1,223,000
Rocky Mountain I 478,314 478,000
Rocky Mountain II 1,640,802 1,761,000
Miracle Partners 1,353,199 1,600,000
Prema Properties 2,428,823 3,000,000
Ralston Car Wash 239,386 240,000
</TABLE>
Under the terms of the Combination Agreement, the required debt levels
specified above may be increased to reflect certain transactions permitted by
the terms of the Combination Agreement or transactions approved by a majority
vote of a committee comprising two WE JAC representatives and one representative
of each of the Ohio Group and All Other Constituent Companies.
Escrowed Shares Are Exclusive Remedy. As noted above, except in the case of
fraud, in the event that the Company suffers losses in excess of the Indemnity
Escrow Shares or in the event that the difference between a Constituent
Company's debt level at Closing and its required debt level exceeds the value of
the Indebtedness Escrow Shares, the Company will have no further remedy against
the Constituent Company or the owners because the obligations of the Constituent
Company and the owners are limited to the amount of the Indemnity Escrow Shares
and the Indebtedness Escrow Shares, respectively. In the event that the losses
the Company suffers with respect to a Constituent Company (including losses
which arise because a Constituent Company's debt level is higher than the level
required at Closing) exceed the value of the Indemnity Escrow Shares or
Indebtedness Escrow Shares, the business and financial condition of the Company
could be materially adversely affected.
Indemnification by the Company
Pursuant to the Combination Agreement, the Company has agreed to indemnify,
defend and hold harmless each of the owners of the Constituent Companies and
their respective successors and assigns against any and all claims, losses,
damages, liabilities and expenses, including reasonable attorney's fees,
suffered because of (i) the untruth, inaccuracy, misrepresentation, omission,
breach or nonfulfillment by the Company or any representation, warranty,
covenant or other agreement contained in the Combination Agreement or (ii) any
untrue statement of a material fact relating to the Company that is contained in
the preliminary prospectus, the Registration Statement or any prospectus forming
a part thereof, or any amendment thereof or supplement thereto, or arising out
of or based on any omission or alleged omission to state therein a material fact
relating to the Company required to be stated therein or necessary to make the
statements therein not misleading.
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Conditions Precedent to the Closing of the Combination Agreement
The obligation of the Company to consummate the Combination is subject to
certain conditions, including among others, (i) that the financial statements of
each of the Constituent Companies comply in all material respects with all
applicable accounting requirements and are fairly presented in conformity with
generally accepted accounting principles, (ii) that favorable opinions of
counsel to the owners of the Constituent Companies are received by the Company,
(iii) that all necessary consents have been received, (iv) that the Registration
Statement has become effective, (v) that the aggregate amount of cash required
to be paid to Constituent Company owners who validly perfect their right to
dissent to certain mergers which form a part of the Combination (or have voted
against a merger and are entitled to later perfect their right to dissent by
taking additional actions following closing in accordance with applicable laws)
shall not exceed 10% of the net cash proceeds estimated to be realized by the
Company in the Offering, assuming that each such dissenting owner would be
entitled to receive for his shares in the Constituent Company cash in an amount
equal to the initial Offering price, multiplied by the number of shares of the
Company Common Stock that they would have been entitled to receive had they not
exercised dissenters' rights, (vi) that specified percentages (which in no case
are lower than 75%) of the total equity ownership of each Constituent Company
which the Company is to acquire pursuant to exchange offers which form a part of
the Combination are tendered to the Company pursuant to such exchange offers and
(viii) the Offering is consummated. The obligation of each Constituent Company
and its owners to consummate the Combination is subject to certain conditions,
including the accuracy of the representations and warranties of the Company
contained in the Combination Agreement, the receipt of a favorable opinion of
counsel to the Company and the receipt of an opinion of Ernst & Young LLP with
respect to certain tax matters.
ASSUMPTION OF OPTION PLANS AND STOCK OPTIONS
Pursuant to the terms of the Combination Agreement, the Company will assume
all of the outstanding stock option plans, stock purchase plans and stock option
agreements to which WE JAC is a party. As a result of the foregoing, options to
purchase 508,100 shares of WE JAC Common Stock at a weighted average exercise
price of $8.72 per share will be converted into options to purchase an identical
number of shares of the Company's Common Stock at the same weighted exercise
price per share upon the consummation of the Combination. See "Certain
Transactions."
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
In connection with the Combination, certain individuals entered into
employment agreements with the Company. For a discussion of the employment
agreements between the Company and its executive officers, see
"Management -- Employment Agreements." In addition, each holder of 10% or more
of the common stock or membership interests of a Constituent Company is required
to execute and deliver an Agreement Not to Compete in favor of the Company. The
terms of these agreements generally provide that, for a period of four years
following the Closing of the Combination, such persons will not compete with the
Company in the line of business engaged in by the Constituent Company of which
such person is a stockholder or member as of Closing within specified geographic
areas.
REAL ESTATE OPTIONS AND RELATED LEASE ARRANGEMENTS
Under the terms of the Combination Agreement partnerships formed by owners
of Lube Ventures, Prema Properties and Miracle Partners have been granted the
option to purchase specified parcels of real estate from the Company following
closing. If these options are exercised, the Company will lease these parcels of
real estate back from the partnership on terms and conditions set forth in the
Combination Agreement. For additional information concerning these options and
the terms of the related leases see "Certain Transactions".
DISTRIBUTIONS PRIOR TO CLOSING
The Combination Agreement provides that, prior to the closing of the
Combination, each of the Constituent Companies which are subject to taxation
under Subchapter S of the Internal Revenue Code or as partnerships shall be
entitled to distribute to their shareholder or members, on a pro rata basis,
cash in amounts sufficient to enable them to discharge their federal, state and
local income tax liabilities which will arise by reason of their being
stockholders or members thereof during tax year 1997. The Combination Agreement
also provides that the Constituent Companies shall have the right to declare and
pay to their stockholders or members cash dividends or distributions in an
amount equal to the amount of the professional fees and expenses paid by such
Constituent Company prior to the Closing in connection with the transactions
contemplated by the Combination Agreement.
The Combination Agreement permits certain of the Constituent Companies to
distribute prior to the Closing to their stockholders and members certain assets
held, directly or indirectly, by such Constituent Companies. In this regard,
Rocky Mountain I is permitted to distribute to its stockholders a certain
$190,000 promissory note held by Rocky Mountain I or the
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cash proceeds thereof; Lube Ventures is permitted to distribute to its members
certain unimproved real estate; Prema Properties is permitted to distribute to
its members certain improved rental real estate and unimproved real estate; and
Miracle Industries is permitted to distribute to its stockholders certain
improved rental real estate, unimproved real estate and a car wash and is also
permitted to cause Indy Ventures to distribute certain unimproved real estate
and a car wash to its members (including Miracle Industries, which may
redistribute such property to its stockholders).
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Common Stock Issued in Combination. In connection with the Combination,
certain officers and directors of the Company will receive shares of Common
Stock with respect to the shares of common stock or membership interests, as the
case may be, they currently hold in their respective Constituent Companies as
follows: Woodley A. Allen: 2,000 shares; George Bavelis: 97,398 shares; Lynn E.
Caruthers: 125,381 shares; Bernard H. Clineburg: 2,500 shares; Clarence E. Deal:
205,167 shares; Effie Eliopulos: 269,531 shares; Bassam N. Ibrahim: 3,850
shares; Arnold Janofsky: 1,961 shares; Richard O. Johnson: 57,590 shares; Arthur
Kellar: 145,029 shares; William R. Klumb: 56,086 shares; Grant G. Nicolai: 7,752
shares; Harry G. Pappas, Jr.: 15,000 shares; John F. Ripley: 11,950 shares; and
Gerald Zamensky: 134,041 shares.
Conversion and Acceleration of Stock Options. Pursuant to the terms of the
Combination Agreement and the terms of outstanding WE JAC stock options, all of
the options to purchase WE JAC Common Stock that are outstanding on the closing
date are to be converted into options to purchase the Company's Common Stock.
Because WE JAC Common Stock is being converted into the Company's Common Stock
on a one-share-for-one-share basis, each option to purchase WE JAC Common Stock
shall be converted into an option to purchase the same number of shares of the
Company's Common Stock at the same exercise price. The chart below indicates as
to the specified directors and officers of the Company the number of options
that each person will hold following closing and the current weighted average
exercise price per share.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTION HOLDER OPTION SHARES EXERCISE PRICE PER SHARE
- ---------------------------------------------- ------------- ------------------------
<S> <C> <C>
Woodley A. Allen 10,000 $10.00
Lynn E. Caruthers 10,000 10.00
Bernard Clineburg 10,000 10.00
Bassam N. Ibrahim 10,000 10.00
James A. Hay 5,000 10.00
Arnold Janofsky 21,500 8.58
Arthur Kellar 10,000 10.00
Robert Kelly 10,000 10.00
Grant G. Nicolai 12,500 8.25
Harry G. Pappas, Jr. 12,500 10.00
John F. Ripley 193,100 8.69
</TABLE>
The vesting of options held by the executives and directors of WE JAC
identified in the table above (other than Messrs. Hay, Janofsky and Nicolai)
will accelerate and vest upon consummation of the Combination. Accordingly,
options to purchase 142,500 shares of WE JAC Common Stock (which, pursuant to
the Combination, will be converted into options to purchase 142,500 shares of
Precision Auto Care Common Stock at the same price per share) in the aggregate
held by such directors and executive officers of WE JAC will vest immediately
following consummation of the Combination.
Grants of Additional Options. The Company intends to grant each of Mr.
Klumb and Ms. Eliopulos options to purchase 12,500 shares of Common Stock
effective at the closing of the Combination. Such options will have an exercise
price per share equal to the initial offering price and one third of the options
will vest on each of the first three anniversary dates of the Combination. The
Company also intends to grant options to purchase an aggregate of 37,500 shares
of Common Stock to two other former owners of Constituent Companies other than
WE JAC. These options will be effective at the closing of the Combination and
will have an exercise price equal to the initial public offering price. One
third of the options will vest on each of the first three anniversary dates of
the Combination.
REAL ESTATE TRANSACTIONS
Under the terms of the Combination Agreement, certain real property which
the Company will acquire from Lube Ventures, Prema Properties, and Miracle
Partners, by reason of the mergers and exchange offers forming the Combination,
will be subject to the terms of certain options granted to limited partnerships
formed by the owners of Lube Ventures, Prema
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Properties and Miracle Partners. Pursuant to the Combination Agreement each of
the partnerships will be granted the option to purchase certain real estate (the
27,000 square foot modular building manufacturing facility in the case of Lube
Ventures, nine car wash centers in the case of Prema Properties, and five car
wash centers in the case of Miracle Partners).
The options may only be exercised during a one year period which will
commence on the second anniversary date of the Combination. If the options are
exercised in whole or in part, the limited partnerships would purchase the
parcels of real estate at a purchase price equal to their then-current fair
market value. The Company would then be required to lease the real estate back
from the partnerships on a triple net basis and at a base rent equal to the fair
rental value of the property. The leases would have an initial term of ten years
and the Company would have the right to renew the leases for two successive ten
year terms.
Mr. Bavelis, Mr. Deal and Ms. Eliopulos, directors of the Company, will
each have a 15.12% interest in the partnership holding the options covering the
Prema Properties parcels of real estate. Mr. Deal and Ms. Elipulos will hold a
50% and 25% interest, respectively, in the partnership holding the option to
pruchase the Lube Ventures parcel of real estate. Mr. Deal will hold 100% of the
partnership interests in the partnership holding the options to purchase the
Miracle Partners' parcels of real estate.
FRANCHISE TRANSACTIONS
Under the terms of the Combination Agreement, the Company has agreed to
sell six Precision Auto Wash franchises and eight Precision Lube Express
franchises to companies formed by certain former owners of the Constituent
Companies (other than WE JAC). Five of the Precision Auto Wash and Precision
Lube Express centers will be combined and operated on five sites. The other four
franchises will be operated on four sites. The other four franchises will be
operated as stand-alone operations. The companies formed by the former owners
will pay the standard initial franchise fees. Such companies will pay standard
royalties, in the case of Precision Auto Wash, and $400 per month on single bay
Precision Lube Express centers and $500 per month on double bay Precision Lube
Express franchises instead of the variable monthly royalties charged to other
franchisees.
The Company has also agreed to sell the Precision Auto Wash equipment and
the Precision Lube Express modular buildings to these businesses at a discount
of 10% from the normal price at which the equipment and buildings are sold by
the Company to its high volume distributors. This will result in a discount of
approximately $250,000 in the aggregate from such prices. Gene Deal, a director
of the Company, has interests ranging from 16.5% to 33% in five of the companies
which will own, in the aggregate, five of the Precision Lube Express franchises
and three of the Precision Auto Wash franchises. Effie Eliopulos, a director of
the Company, has interests ranging from 16.5% to 75% in companies which will
own, in the aggregate, four of the Precision Lube Express franchises and four of
the Precision Auto Wash franchises. Mr. Klumb, a director of the Company, owns a
25% interest in a company that will operate one of the Precision Lube Express
franchises. Mr. Bavelis, a director of the Company, owns a 25% interest in a
company that will operate one of the Precision Auto Wash franchises.
OTHER TRANSACTIONS
Under the terms of the Combination Agreement, the Company will discharge
substantially all of the indebtedness of each of the Constituent Companies at
closing. Messrs. Bavelis, Deal, Klumb, Zamensky, and Ms. Eliopulos have
personally guaranteed indebtedness in the principal amounts of $2.6 million,
$3.4 million, $2.4 million, $2.4 million, and $7.6 million, respectively, that
is to be discharged at closing.
COMPANY POLICY
It is anticipated that future transactions with affiliates of the Company
will be minimal and will be approved by a majority of the disinterested members
of the Board of Directors or will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 19,000,000 shares of Common Stock and
1,000,000 shares of preferred stock, $.01 par value per share (the "Preferred
Stock"). Upon completion of the Offering and giving effect to the Combination,
the Company will have 5,080,695 shares of Common Stock and no shares of
Preferred Stock outstanding. The following description of capital stock of the
Company is qualified in its entirety by reference to the Company's Articles of
Incorporation, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Additional shares of Common
Stock are reserved for issuance upon exercise of employee and director stock
options. See "Management -- Compensation Pursuant to Plans."
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
on which shareholders are entitled to vote generally. Shareholders have no right
to cumulate their votes in the election of directors. Accordingly, holders of a
majority of the outstanding shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Holders of Common Stock may receive dividends and other distributions when, as
and if declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not intend to declare or pay any dividends
on the shares of its Common Stock in the near future. See "Dividend Policy." In
the event of a voluntary or involuntary liquidation, dissolution or winding up
of the Company, after any preferential amounts to be distributed to the
Preferred Stock and any other class or series of stock having a preference over
the outstanding Common Stock, the holders of Common Stock are entitled to share
ratably in proportion to the number of shares held by each holder in all assets
remaining after payment of liabilities, including all distributions to holders
of Preferred Stock having a liquidation preference over the Common Stock. The
Company's Articles of Incorporation states that no holder of any class or series
of stock of the Company shall have any preemptive rights. The Company may, in
its sole discretion, redeem certain of the shares of the Company's stock in
accordance with Virginia Law. All outstanding shares of Common Stock are, and
the shares offered hereby will be, when issued and paid for, fully paid and
non-assessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may become subordinate, to the rights of holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future from time to time.
PREFERRED STOCK
Under the Articles of Incorporation, the Board of Directors is authorized
to issue Preferred Stock, in one or more series, and to fix the number of shares
constituting such series and the designation of such series, the voting powers
(if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any qualifications,
limitations or restrictions thereof, of the shares of such series. The Company
has no present intention to issue any series of Preferred Stock.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation provide for mandatory
indemnification of the officers and directors of the Company to the fullest
extent permitted by Virginia law, including some instances in which
indemnification is otherwise discretionary under Virginia law. The Articles of
Incorporation contains provisions that eliminate the personal liability of the
Company's directors for monetary damages resulting from breaches of their
fiduciary duty as directors other than for acts or omissions which involve
intentional misconduct or a knowing violation of law, payment of unlawful
distributions, or for any transaction from which the director derived an
improper personal benefit. The Company believes that these provisions are
essential to attracting and retaining qualified persons as directors.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, and the
Company is not aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
ANTI-TAKEOVER PROVISIONS
Under the Virginia Stock Corporation Act's control share acquisitions law,
voting rights of shares of stock of a Virginia corporation acquired by an
acquiring person at ownership levels of (i) more than 20% but less than 33 1/3%,
(ii) more than 33 1/3% but less than a majority or (iii) a majority or more of
all outstanding shares of voting stock may, under certain circumstances, be
denied unless conferred by a special stockholder vote of a majority of the
outstanding shares entitled to vote for
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directors, other than shares held by the acquiring person and officers and
certain directors of the corporation or, among other exceptions, such
acquisition of shares is made pursuant to a merger agreement with the
corporation. If authorized in the corporation's articles or by-laws (and the
Company's articles contain this authorization), the statute also permits the
corporation to redeem the acquired shares at the average per share price paid
for them if the voting rights are not approved or if the acquiring person does
not file a "control share acquisition statement" with the corporation within
sixty days of the last acquisition of such shares. If voting rights are approved
for control shares comprising more than fifty percent of the corporation's
outstanding stock, objecting shareholders may have the right to have their
shares repurchased by the corporation for "fair value."
The Virginia Stock Corporation Act sets forth restrictions on "affiliated
transactions" (including, among other various transactions: (i) mergers; (ii)
share exchanges; (iii) sales, leases, exchanges, mortgages, pledges, transfers
or other dispositions of assets of the Company having an aggregate fair market
value of more than 5% of the Company's net worth; (iv) certain reclassifications
of securities; and (v) dissolutions involving an "interested shareholder"
(generally the beneficial owner of more than 10% of any class of the
corporation's outstanding voting shares). During the three years following the
date a shareholder becomes an interested shareholder, any affiliated transaction
with the interested shareholder must be approved by both a majority of the
"disinterested directors" (those directors who were directors before the
interested shareholder became an interested shareholder or who were recommended
for election by a majority of disinterested directors) and by the affirmative
vote of the holders of two-thirds of the corporation's voting shares other than
shares beneficially owned by the interested shareholder. The foregoing
supermajority voting requirement does not apply to affiliated transactions if
(i) the affiliated transaction has been approved by a majority of the
disinterested directors, or (ii) subject to certain additional requirements, in
the affiliated transaction the holders of each class or series of voting shares
will receive consideration meeting specified fair price and other requirements
designed to insure that all shareholders receive fair and equivalent
consideration, regardless of when they tender their shares.
The Company's Articles of Incorporation contain certain anti-takeover
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and that may have the
effect of delaying, deferring or preventing a future takeover or change in
control of the Company unless such takeover is approved by the Board of
Directors. These provisions include the classification of the Board of Directors
into three classes. Each class of directors is to serve for a three-year term.
Such provisions may also render the removal of the current Board of Directors
more difficult than would be the case in the absence of such provisions.
The Company's Articles of Incorporation and Bylaws provide that the Board
of Directors shall consist of not less than 10 and not more than 20 directors
(subject to any rights of the holders of shares of Preferred Stock to elect
additional directors), with the exact number to be fixed by the Board of
Directors pursuant to a resolution adopted by a majority of the entire Board.
The Board of Directors is divided into three classes of directors, which classes
are as nearly equal in number as possible. One class of directors is elected
each year for a term of three years. Directors may be removed from office only
for cause and only by the affirmative vote of the holders of at least 80% of the
voting power of all outstanding shares of capital stock of the Company entitled
to vote generally in the election of directors (the "Voting Stock"), voting as a
single class. Subject to any rights of the holders of shares of Preferred Stock,
vacancies in the Board of Directors and newly created directorships are filled
for the unexpired term only by the vote of a majority of the remaining directors
in office. Pursuant to the Articles of Incorporation, advance notice of
shareholder nominations for the election of directors must be given in the
manner provided in the Company's Bylaws. The Bylaws provide that written notice
of the intent of a shareholder to make a nomination at, or to bring other
business before, a meeting of shareholders must be delivered to the Secretary of
the Company generally not less than 90 days prior to the anniversary of the date
of the previous year's meeting, in the case of an annual meeting, and not
earlier than the 90th day prior to the meeting and not later than the close of
business on the later of the 70th day prior to the special meeting or the 10th
day following the day on which public announcement of the date of the special
meeting is first made, in the case of a special meeting. The notice must contain
certain background information about the shareholder and, in the case of an
intent to make a nomination, the nominee and the number of shares of the
Company's capital stock beneficially owned by the nominee.
Under the Articles of Incorporation and Bylaws, except as otherwise
required by law and subject to the rights of the holders of shares of Preferred
Stock, shareholders may not call a special meeting of shareholders. Only the
Board of Directors, pursuant to a resolution adopted by a majority of the entire
Board, may call a special meeting of shareholders. The Virginia Stock
Corporation Act provides that any action required or permitted to be taken by
shareholders of a corporation may be taken without a meeting, without prior
notice, and without a shareholder vote if a written consent or consents setting
forth the action to be taken is signed by the holders of outstanding shares of
capital stock having the requisite number of votes that would be necessary to
authorize or take such action at a meeting of shareholders. The Company's
Articles of
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Incorporation requires that shareholder action be taken at a meeting of
shareholders and prohibits shareholder action by written consent.
The purpose of certain provisions of the Articles of Incorporation and
Bylaws discussed above relating to (i) a classified Board of Directors; (ii) the
removal of directors and the filling of vacancies; (iii) the prohibition of
shareholder action by written consent; and (iv) the supermajority voting
requirements for the repeal of provisions (i) through (iii) is to help assure
the continuity and stability of the business strategies and policies of the
Company and to discourage certain types of transactions that involve an actual
or threatened change of control of the Company. They are designed to make it
more difficult and time-consuming to change majority control of the Board of
Directors and thus to reduce the vulnerability of the Company to an unsolicited
takeover proposal or to an unsolicited proposal for the restructuring or sale of
all or part of the Company. Such provisions in the Company's Articles of
Incorporation and Bylaws may make more difficult or discourage a proxy contest,
or the assumption of control, by a holder of a substantial block of shares of
Common Stock, or the removal of the incumbent Board of Directors, and could thus
increase the likelihood that incumbent directors will retain their positions.
The provisions of the Articles of Incorporation and Bylaws and the Virginia
Stock Corporation Act help ensure that the Board of Directors, if confronted
with an unsolicited proposal from a third party who has acquired a block of
shares of Common Stock, will have sufficient time to review the proposal and
develop appropriate alternatives, if any, on behalf of the Company's
shareholders. These provisions are intended to encourage persons seeking to
acquire control of the Company to initiate such an acquisition through
arm's-length negotiations with the Board of Directors. Such provisions may have
the effect of discouraging a third party from making an unsolicited tender offer
or otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its shareholders.
The Articles of Incorporation require the vote of the holders of 80% or
more of the voting power of the outstanding shares of voting stock of the
corporation, voting together as a single class to amend the provisions of the
Articles of Incorporation and Bylaws which govern (i) redemption rights, (ii)
the Board of Directors, (iii) shareholder actions, (iv) the amendment of the
Articles of Incorporation and Bylaws, and (v) the limitation of director and
officer liability and indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Union Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of Common Stock into the public market after
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price for the Common Stock and the ability of the
Company to raise equity capital. The Company can make no prediction as to the
effect, if any, that the sale or availability for future sale of shares of
additional Common Stock will have on the market price of the Common Stock
prevailing from time to time.
Upon completion of the Offering, the Company will have 5,080,695 shares of
Common Stock outstanding (assuming no exercise of options or warrants after the
date of this Prospectus). These shares will consist of 2,780,695 shares of
Common Stock issued to the owners of the Constituent Companies in the
Combination and 2,300,000 shares of Common Stock issued in the Offering. See
"The Combination."
The 2,340,000 shares of Common Stock sold in the Offering (plus any
additional shares sold upon exercise of the Underwriters' over-allotment option)
will be freely tradable, except that any shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitations of
Rule 144 ("Rule 144") under the Securities Act, as described below.
The 2,780,695 shares of Common Stock that will be issued to the owners of
the Constituent Companies will be registered under the Securities Act, and,
accordingly, such shares will be freely tradeable, except that shares acquired
in the Combination by an Affiliate of a Constituent Company may generally only
be sold in compliance with Rule 145 under the Securities Act ("Rule 145") as
described below. In addition pursuant to the terms of the Combination Agreement,
the Constituent Company owners who receive more than 3,000 shares of Common
Stock in the Combination will not be permitted to sell any shares of Common
Stock issued to them at the closing of the Combination for a period of 180 days
following such closing. After the expiration of such 180-day period, all of such
shares (other than shares held by Affiliates of the Company or the Constituent
Companies) may be sold freely. Of the shares of Common Stock that will be issued
to the owners of the Constituent Companies, 2,670,095 shares will be subject to
this 180-day restriction.
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As noted above, shares of Common Stock held by Affiliates of the Company or
the Constituent Companies may only be sold in compliance with the limitations of
Rule 144 under the Securities Act or in compliance with Rule 145, as the case
may be. Pursuant to Rule 144 and Rule 145 as currently in effect, beginning 90
days after the Offering, a person (or persons whose shares are aggregated) is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly reported trading volume of the Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 and 145
are also subject to certain restrictions relating to the manner of sale, notice
and the availability of current public information about the Company. These
provisions will be binding upon Affiliates of Constituent Companies for a period
of one year following the date on which the Combination is consummated.
Following that time, such persons will be able to sell their shares of Common
Stock freely, so long as they are not an Affiliate of the Company at that time.
A person who is not an Affiliate of the Company at any time during the
three-months preceding a sale will be entitled to sell such shares immediately
without regard to volume limitations, manner of sale provisions or notice or
other requirements of Rule 144.
In addition to the shares of Common Stock that will be outstanding, an
aggregate of up to 685,100 shares of Common Stock could be issued upon exercise
of options and warrants that will be outstanding after the Offering. These
options and warrants will be exercisable as follows: (i) options and warrants to
purchase up to 389,057 shares of Common Stock will be exercisable immediately;
(ii) options to purchase an additional 108,950 shares of Common Stock will
become exercisable between the closing of the Offering and the first anniversary
of the closing of the Offering; (iii) options to purchase an additional 113,243
shares of Common Stock will become exercisable between the first anniversary of
the closing of the Offering and the second anniversary of the closing of the
Offering; (iv) options to purchase an additional 69,676 shares of Common Stock
will become exercisable between the second anniversary of the closing of the
Offering and the third anniversary of the closing of the Offering; and (v)
options to purchase an additional 4,174 shares of Common Stock will become
exercisable between the third anniversary of the closing of the Offering and the
fourth anniversary of the closing of the Offering. The Company intends to file
one or more registration statements on Form S-8 under the Securities Act to
register all shares of Common Stock subject to these stock options and warrants.
The Company expects to file these registration statements promptly after the
closing of this Offering, and such registration statements will become effective
upon filing. The shares covered by these registration statements will be
eligible for sale in the public markets, subject to the lock-up agreements
discussed above, if applicable.
65
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom A.G. Edwards &
Sons, Inc. and Ferris, Baker Watts, Incorporated are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the underwriting agreement (the "Underwriting
Agreement"), to purchase from the Company and the Selling Shareholders the
numbers of shares of Common Stock set forth below opposite their respective
names at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
A.G. Edwards & Sons, Inc..........................................................
Ferris, Baker Watts, Incorporated.................................................
Total........................................................................
---------
---------
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any of such shares are
purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the initial
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of
Common Stock. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share to other dealers. The initial
offering price and the concessions and discount to dealers may be changed by the
Underwriters after the initial public offering.
The Company has granted to the Underwriters an option exercisable for 30
days from the date of this Prospectus, to purchase up to an additional shares
of Common Stock at the initial offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Common Stock offered hereby.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters and controlling persons, if any, against, certain liabilities,
including liabilities under the Securities Act or will contribute to the
payments the Underwriters or any controlling persons may be required to make in
respect thereof.
The Company, its directors and executive officers and certain existing
shareholders (including the Selling Shareholders) have agreed for a period of
180 days from the date of this Prospectus, not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, grant any option to purchase, or
otherwise dispose (or announce any offer, sale, grant of any option to purchase
or other disposition) of any shares of Common Stock, or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock in
the public market without the prior written consent of A.G. Edwards & Sons, Inc.
on behalf of the Underwriters provided, however, the Company may grant stock
options under, and issue shares of Common Stock upon the exercise of outstanding
stock options granted under, the Company's stock option plans.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial offering price of the Common Stock will be
determined by negotiations between the Company and the Representatives. Among
the factors to be considered in determining the initial offering price include
the financial and operational history and trends of the Company, the history of
and the prospects for the industry in which the Company competes, an assessment
of the Company's management, its past and present operations, its past and
present earnings and the trend of such earnings, the general condition of the
securities markets at the time of the Offering and the price-earnings multiples
and market prices of publicly traded companies the Representatives and the
Company believe to be comparable to the Company.
Application has been made to include the Common Stock for quotation on the
Nasdaq National Market under the symbol "PACI." The Company has been advised by
the Representatives that each of the Representatives presently intend to make a
market in the Common Stock offered hereby, however, the Representatives are not
obligated to do so, and any market making activity may be discontinued at any
time. There can be no assurance that an active public market for the Common
Stock will develop and continue after the Offering.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions
66
<PAGE>
effected in accordance with Rule 104 of Regulation M promulgated under the
Securities Exchange Act of 1934, as amended, pursuant to which such persons may
bid for or purchase the Common Stock for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more Common Stock in connection with
the Offering than they are committed to purchase from the Company, and in such
case may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 345,000 shares of
Common Stock, by exercising the over-allotment option referred to above. In
addition, the Underwriters may impose "penalty bids" under contractual
arrangements with dealers whereby they may reclaim from a dealer participating
in the Offering for the account of the Underwriters the selling concession with
respect to the Common Stock that is distributed in the offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
prices of the Common Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
Ferris, Baker Watts, Incorporated ("FBW") was engaged by WE JAC Corporation
to provide financial advisory and investment banking services in connection with
the formation of the Company and the structuring of the Combination. In
connection with the engagement, FBW has received a financial advisory fee of
$40,000 and will receive an additional $160,000 upon consummation of the
Combination.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company by Miles & Stockbridge, a
Professional Corporation, Baltimore, Maryland. Certain legal matters will be
passed upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements appearing in this Prospectus and Registration
Statement of WE JAC Corporation for the three years in the period ended June 30,
1997, of Miracle Industries for the two years in the period ended December 31,
1996, of Lube Ventures for the year ended December 31, 1996 and of Prema
Properties for the year ended December 31, 1996, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus, which is a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and the exhibits and schedules filed
as a part thereof. Statements contained in the Prospectus concerning the
provisions or contents of any contract, agreement or any other document referred
to herein are not necessarily complete. With respect to each such contract,
agreement or document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matters
involved, and each statement shall be deemed qualified in its entirety by such
reference to the copy of the applicable document filed with the Commission. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of the Registration Statement and the exhibits and schedules
thereto can be obtained from the Public Reference Section of the Commission upon
payment of prescribed fees. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
that site is http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Upon effectiveness of the Registration Statement, the Company will become
subject to the informational and periodic reporting requirements of the Exchange
Act, and in accordance therewith, will file periodic reports, proxy statements
and other information with the Commission. Such periodic reports, proxy
statements and other information will be available for inspection and copying at
the public reference facilities and other regional offices referred to above.
The Company intends to register the securities offered by the Registration
Statement under the Exchange Act simultaneously with the effectiveness of the
Registration Statement and to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports for the first
three fiscal quarters of each fiscal year containing unaudited interim financial
information.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WE JAC CORPORATION
Report of Independent Auditors....................................................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1997.................................................... F-3
Consolidated Statements of Operations for the three years in the period ended June 30, 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the three years in the period ended June 30, 1997................ F-5
Consolidated Statements of Cash Flows for the three years in the period ended June 30, 1997.......................... F-6
Notes to Consolidated Financial Statements........................................................................... F-7
MIRACLE INDUSTRIES, INC.
Report of Independent Auditors....................................................................................... F-16
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited)........................... F-17
Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 and the six months ended June
30, 1996 and 1997 (unaudited)..................................................................................... F-18
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1996 and 1997 (unaudited)................................................................... F-19
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996 and the six months ended June
30, 1996 and 1997 (unaudited)..................................................................................... F-20
Notes to Consolidated Financial Statements........................................................................... F-21
LUBE VENTURES, INC.
Report of Independent Auditors....................................................................................... F-27
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)................................................. F-28
Statements of Operations for the years ended December 31, 1995 (unaudited) and 1996 and the six months ended June 30,
1996 and 1997 (unaudited)......................................................................................... F-29
Statements of Changes in Stockholders' Equity for the years ended December 31, 1995 (unaudited) and 1996 and the six
months ended June 30, 1996 and 1997 (unaudited)................................................................... F-30
Statements of Cash Flows for the years ended December 31, 1995 (unaudited) and 1996 and the six months ended June 30,
1996 and 1997 (unaudited)......................................................................................... F-31
Notes to Financial Statements........................................................................................ F-32
PREMA PROPERTIES, LTD.
Report of Independent Auditors....................................................................................... F-36
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)................................................. F-37
Statements of Operations and Members' Equity for the years ended December 31, 1995 (unaudited) and 1996 and the six
months ended June 30, 1996 and 1997 (unaudited)................................................................... F-38
Statements of Cash Flows for the years ended December 31, 1995 (unaudited) and 1996 and the six months ended June 30,
1996 and 1997 (unaudited)......................................................................................... F-39
Notes to Financial Statements........................................................................................ F-40
PRECISION AUTO CARE, INC.
Report of Independent Auditors....................................................................................... F-43
Balance Sheet as of June 30, 1997.................................................................................... F-44
Notes to Financial Statement......................................................................................... F-45
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
WE JAC CORPORATION
We have audited the accompanying consolidated balance sheets of WE JAC
Corporation and subsidiary as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the three years in the period ended June 30, 1997. Our audits also included the
financial statement schedule. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WE JAC Corporation and subsidiary at June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the three
years in the period ended June 30, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Vienna, Virginia
August 15, 1997
F-2
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 751,472 $ 576,608
Accounts receivable, net of allowance of $534,009 and $301,227............................... 3,012,906 4,080,216
Inventory.................................................................................... 1,133,858 768,496
Notes receivable, current portion, net of allowance of $97,281 and $136,526.................. 363,759 512,960
Prepaid expenses............................................................................. 361,646 404,300
Deferred costs............................................................................... -- 1,211,257
Deferred income taxes........................................................................ 880,000 257,000
----------- -----------
Total current assets........................................................................... 6,503,641 7,810,837
Notes receivable, noncurrent portion, net of allowance of $82,175 and $61,085.................. 1,041,607 1,360,958
Property, plant and equipment, net............................................................. 939,327 853,626
Other assets:
Franchise rights, net of accumulated amortization of $8,715,572 and $9,682,348............... 16,298,618 15,879,157
Deferred loan costs, net..................................................................... 159,804 89,292
Deposits, trademarks and other............................................................... 711,290 700,398
----------- -----------
Total other assets............................................................................. 17,169,712 16,668,847
----------- -----------
Total assets................................................................................... $25,654,287 $26,694,268
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................................................... $ 3,383,172 $ 5,202,650
Income taxes payable......................................................................... 757,011 680,000
Current maturities, notes payable............................................................ 129,550 161,098
Current maturities, term loan................................................................ 1,600,000 7,066,667
Current maturities, revolving line-of-credit................................................. -- 1,529,301
Deferred revenue, current portion............................................................ 453,882 413,465
----------- -----------
Total current liabilities...................................................................... 6,323,615 15,053,181
Notes payable, net of current portion.......................................................... 645,413 622,308
Term loan, net of current portion.............................................................. 4,533,333 --
Revolving line-of-credit, net of current portion............................................... 1,554,108 --
Deferred revenue, net of current portion....................................................... 997,308 529,837
Lease deposits................................................................................. 194,557 194,557
----------- -----------
Total liabilities.............................................................................. 14,248,334 16,399,883
Stockholder's equity:
Common stock, $.01 par; 2,600,000 shares authorized; 1,562,393 and 1,580,740 shares issued;
1,562,393 and 1,333,700 shares outstanding, in 1996 and 1997, respectively................ 15,624 15,807
Additional paid-in capital................................................................... 8,302,396 8,407,722
Retained earnings............................................................................ 3,087,933 4,342,813
Treasury stock, at cost; 247,040 shares in 1997.............................................. -- (2,471,957)
----------- -----------
Total stockholders' equity..................................................................... 11,405,953 10,294,385
----------- -----------
Total liabilities and stockholder's equity..................................................... $25,654,287 $26,694,268
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
Royalty....................................................................... $12,845,393 $12,998,505 $13,755,440
Equipment and parts........................................................... 12,178,256 12,203,414 11,852,062
Franchise..................................................................... 1,246,737 1,316,055 1,551,097
Other......................................................................... 308,569 216,340 298,332
----------- ----------- -----------
Total sales..................................................................... 26,578,955 26,734,314 27,456,931
Direct cost:
Royalty....................................................................... 7,240,287 7,211,061 7,788,266
Equipment and parts........................................................... 11,310,372 11,280,924 11,085,165
Franchise..................................................................... 1,082,280 1,063,895 1,239,444
Other......................................................................... 409,046 152,195 178,299
----------- ----------- -----------
Total direct cost............................................................... 20,041,985 19,708,075 20,291,174
----------- ----------- -----------
Contribution (exclusive of amortization shown separately below)................. 6,536,970 7,026,239 7,165,757
General and administrative expense.............................................. 2,887,746 2,276,124 2,521,775
Amortization of franchise rights................................................ 1,015,580 964,311 968,072
Company-owned stores held for resale (loss)..................................... (351,537) (454,668) 29,194
----------- ----------- -----------
Operating income................................................................ 2,282,106 3,331,136 3,705,104
Other income (expense):
Interest expense.............................................................. (1,230,015) (1,031,705) (1,056,597)
Interest income............................................................... 92,477 67,353 147,638
Other......................................................................... (1,297,352) (118,798) (270,405)
----------- ----------- -----------
(2,434,890) (1,083,150) (1,179,364)
Income (loss) before income tax expense and extraordinary gain.................. (152,784) 2,247,986 2,525,740
Provision for income taxes...................................................... 71,743 1,177,810 1,270,860
----------- ----------- -----------
Income (loss) before extraordinary gain......................................... (224,527) 1,070,176 1,254,880
Extraordinary gain on repurchase of stock warrants related to debt (net of
applicable income taxes of $156,000).......................................... 157,328 -- --
----------- ----------- -----------
Net income (loss)............................................................... $ (67,199) $ 1,070,176 $ 1,254,880
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
--------- ------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994................... 1,414,418 $14,144 $7,160,983 $2,084,956 -- $ 9,260,083
Net loss................................. -- -- -- (67,199) -- (67,199)
--------- ------- ---------- ---------- ----------- -----------
Balance at June 30, 1995................... 1,414,418 14,144 7,160,983 2,017,757 -- 9,192,884
Private placement of stock............... 147,975 1,480 1,141,413 -- -- 1,142,893
Net income............................... -- -- -- 1,070,176 -- 1,070,176
--------- ------- ---------- ---------- ----------- -----------
Balance at June 30, 1996................... 1,562,393 15,624 8,302,396 3,087,933 -- 11,405,953
Issuances of common stock................ 18,347 183 105,326 -- -- 105,509
Treasury stock purchase.................. (247,040) -- -- -- (2,471,957) (2,471,957)
Net income............................... -- -- -- 1,254,880 -- 1,254,880
--------- ------- ---------- ---------- ----------- -----------
Balance at June 30, 1997................... 1,333,700 $15,807 $8,407,722 $4,342,813 $(2,471,957) $10,294,385
--------- ------- ---------- ---------- ----------- -----------
--------- ------- ---------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................................ $ (67,199) $ 1,070,176 $ 1,254,880
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 1,441,923 1,234,705 1,251,462
Loss on disposal of property, plant, and equipment............................. -- 306,705 207,256
Extraordinary gain on repurchase of stock warrants............................. (313,828) -- --
Deferred income taxes.......................................................... (261,000) (67,000) 623,000
Changes in operating assets and liabilities:
Accounts and notes receivable............................................... (64,097) (768,799) (1,535,862)
Inventory................................................................... 49,706 (43,044) 365,362
Prepaid expenses, recoverable income taxes, deposits and other.............. (157,981) (72,420) (1,193,484)
Accounts payable and accrued liabilities.................................... 1,442,618 (1,349,981) 1,819,478
Income taxes payable........................................................ (345,576) 701,363 (77,011)
Deferred revenue, net....................................................... 224,524 (549,833) (507,888)
----------- ----------- -----------
Net cash provided by operating activities........................................ 1,949,090 461,872 2,207,193
INVESTING ACTIVITIES:
Purchases of property and equipment............................................ (504,520) (358,392) (296,088)
Purchase of franchise agreements and rights.................................... -- (754,545) (545,730)
Purchase of trademarks......................................................... -- (62,949) (49,535)
----------- ----------- -----------
Net cash used in investing activities............................................ (504,520) (1,175,886) (891,353)
FINANCING ACTIVITIES:
Repurchase of stock warrants................................................... (750,000) -- --
Treasury stock purchases....................................................... -- -- (2,471,957)
Issuance of common stock....................................................... -- 1,142,893 105,509
Loan acquisition costs......................................................... (220,603) (39,374) (41,226)
Proceeds from term loan and line of credit..................................... 8,408,058 -- 2,816,667
Proceeds from notes payable.................................................... 472,626 1,593,808 101,642
Repayments of long-term debt and notes payable................................. (9,761,636) (1,764,374) (2,001,339)
----------- ----------- -----------
Net cash (used in) provided by financing activities.............................. (1,851,555) 932,953 (1,490,704)
----------- ----------- -----------
Net change in cash and cash equivalents.......................................... (406,985) 218,939 (174,864)
Cash and cash equivalents at beginning of year................................... 939,518 532,533 751,472
----------- ----------- -----------
Cash and cash equivalents at end of year......................................... $ 532,533 $ 751,472 $ 576,608
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
WE JAC Corporation (WE JAC or the Company) is a Delaware Corporation that
was incorporated on December 23, 1986. The Company commenced operations when it
acquired all of the stock of Precision Tune Auto Care, Inc., a Virginia
corporation, on April 30, 1987. On April 30, 1987, WE JAC Acquisitions, Inc., a
wholly owned subsidiary of WE JAC, acquired all of the stock of Precision Tune
Auto Care, Inc. (Precision Tune Auto Care), and the two companies were merged.
Precision Tune Auto Care was the surviving company and became a wholly owned
subsidiary of WE JAC. The acquisition was accounted for by WE JAC as a purchase
for financial accounting purposes, and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed on the basis of
estimated fair values. On July 25, 1989, Precision Tune Auto Care acquired
National 60 Minute Tune, Inc. (N60MT).
NATURE OF OPERATIONS
Precision Tune Auto Care, Inc. is an international franchising company
which sells individual franchises for automotive service businesses known as
Precision Tune Auto Care centers, as well as development rights for multiple
franchises in specific geographic areas. A Precision Tune Auto Care center is a
retail service business specializing in automotive maintenance services,
including engine performance, oil change and lubrication, and brake services.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
WE JAC Corporation and its wholly owned subsidiary, Precision Tune Auto Care.
During 1996, Precision Tune Auto Care operated thirteen Precision Tune Auto Care
centers. As of June 30, 1996, the Company had divested ten of these centers,
leaving three still in operation. During the year ended June 30, 1997, the
Company divested the three remaining Precision Tune Auto Care centers. Revenues
and expenses from the company-owned centers are included as a net amount in the
consolidated statements of operations and are listed in detail in the table
below. All significant intercompany transactions and balances have been
eliminated in consolidation.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue........................................................................... $ 3,597,772 $ 2,980,153 $ 195,866
Expense........................................................................... (3,949,309) (3,434,821) (166,672)
----------- ----------- -----------
$ (351,537) $ (454,668) $ 29,194
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
REVENUE RECOGNITION
The Company recognizes revenue from the sale of a franchise as certain
obligations to the franchisee are met.
The Company, through its Precision Tune Auto Care subsidiary, enters into
domestic Area Subfranchise Agreements and international Master License
Agreements (Agreements) which grant the subfranchisor and master licensor,
respectively, the right to sell, on the Company's behalf, Precision Tune Auto
Care franchises (PTAC franchise) within a specific geographic region. Revenue
from the sale of area subfranchise rights is deferred and recognized ratably
over the terms of the Agreement, generally 10 years, because the Company's
obligation under the Agreement does not depend significantly upon the number of
PTAC franchises opened. The Company's continuing obligations to its area
subfranchisors include training in system procedures and techniques, a copy of
the Company's uniform franchise offering circulars, samples of advertising and
promotional materials, the prompt processing of applications of prospective
franchisees, and other assistance considered reasonable by the Company. The
Company is also required to promptly remit the area subfranchisor's portion of
collected fees and, upon written request, to furnish summary reports of gross
sales and fees of franchisees in the area subfranchisor's territory. Revenue
from the sale of master license rights is recognized upon signing the Agreement
as the Company is not required to support the international PTAC franchises as
there is no contractual agreement between the Company and the international PTAC
franchisees.
F-7
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The Company's royalty revenues are recognized as earned and in accordance
with specific terms of each Agreement. At the end of any accounting period,
royalty revenue estimates are made for the franchisees' revenues earned but not
yet reported. The royalty revenue accrual is adjusted in the subsequent period
as a result of immaterial differences between franchisees' actual and estimated
revenues.
Revenue from the sale of parts is recognized when the parts are shipped
from the Company's warehouse.
Revenue from the sale of equipment is recognized when notification is
received rom the manufacturer that the equipment has been shipped to the PTAC
franchisee.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid instruments with
original maturities of three months or less.
INVENTORY
Inventory consists primarily of auto parts and is priced at the lower of
cost or market, using the moving-average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets. The
estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and leasehold improvements.................................... 7-15
Furniture and fixtures................................................. 3-8
Equipment.............................................................. 3-8
Other items............................................................ 3-7
</TABLE>
FRANCHISE RIGHTS
Purchase price in excess of the fair market value of net assets acquired is
included in franchise agreements and is amortized principally over 30 years on a
straight-line basis.
The Company occasionally repurchases franchise rights. The decision to
repurchase is made solely at management's discretion and is not a contractual
obligation. The Company also will periodically obtain possession of franchise
rights by exchanging notes payable or exercising rights outlined in the
franchise agreements. The Company's policy is to capitalize the rights
reacquired at the lower of the cost of reacquisition or fair market value. The
Company amortizes the repurchased franchise rights over ten years using an
accelerated method.
DEFERRED LOAN COSTS
Deferred loan costs are amortized and charged to interest expense over the
initial term of the loan.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. A valuation allowance is established, if necessary, to reduce
deferred income tax assets to the amount expected to be realized. For financial
reporting purposes, the Company computes its federal and state income taxes on a
separate company basis.
STOCK BASED COMPENSATION
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
F-8
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
value of stock options or to continue to follow the intrinsic value method set
forth in APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
but disclose the pro forma effects on net income (loss) had the fair value of
the options been expensed. The Company has elected to continue to apply APB 25
in accounting for its stock option incentive plans. (See Note 9).
SEGMENT REPORTING
The Company believes that it operates in one industry segment -- as a
franchisor of the Precision Tune Auto Care brand name automotive services.
The Company intends to adopt Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131), in fiscal year 1998. SFAS No. 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
The adoption of SFAS No. 131 is not expected to materially impact the Company's
financial position or results of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets or other assets for impairment
periodically. In completing this evaluation, the estimated future undiscounted
cash flows associated with the asset is compared to the asset's carrying amount
to determine if a write-down is required. If a write-down is required, the
Company prepares a discounted cash flow analysis to determine the amount of the
write-down.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable and
notes receivable. The Company periodically performs credit evaluations of
customers' financial condition.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR END
In February 1996, the Board of Directors approved a change in the Company's
fiscal year end from April 30 to June 30. All years presented reflect this
change.
2. DEFERRED COSTS
During the latter part of 1997, the Company incurred approximately
$1,221,000 in expenses related to its efforts to raise permanent equity capital.
These costs are being deferred and will be deducted from the equity proceeds
once the transaction is completed, or the Company's portion will be charged to
operations if the Company's initial public offering (IPO) is not completed. If
the IPO is not completed, several other companies that are a party to a merger
and exchange offer transaction that would occur simultaneously with the IPO,
have agreed to reimburse the Company for their portion of the costs, estimated
at 45% of the total. At June 30, 1997, most of these costs are unpaid and are
included in accounts payable and accrued liabilities.
F-9
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Land...................................................................... $ 57,865 $ 57,865
Building and leasehold improvements....................................... 131,552 128,551
Furniture and fixtures.................................................... 561,159 829,256
Equipment................................................................. 797,463 561,831
Other items............................................................... 51,866 36,631
---------- ----------
1,599,905 1,614,134
Accumulated Depreciation.................................................. (660,578) (760,508)
---------- ----------
Property, plant and equipment, net........................................ $ 939,327 $ 853,626
---------- ----------
---------- ----------
</TABLE>
During the years ended June 30, 1995, 1996 and 1997, the Company's
depreciation expense was $208,000, $217,000, and $175,000 respectively.
4. INCOME TAXES
Income tax expense consists of the following items:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Current tax expense - federal and state...................... $ 488,743 $1,244,810 $ 647,860
Deferred tax expense (benefit) - federal and state........... (261,000) (67,000) 623,000
--------- ---------- ----------
Total income tax expense..................................... $ 227,743 $1,177,810 $1,270,860
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The effective tax rate differed from the statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Statutory federal rate.......................................................... 34 % 34 % 34 %
Franchise agreement amortization................................................ 147 11 11
State taxes..................................................................... 22 5 5
Permanent differences due to purchase accounting................................ (32 ) -- --
Other........................................................................... (29 ) 2 --
---- ------ ------
Effective tax rate.............................................................. 142 % 52 % 50 %
---- ------ ------
---- ------ ------
</TABLE>
The percentages for 1995 are distorted due to the small pretax operating
loss and the impact of the extraordinary gain on repurchase of stock warrants
related to debt.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The significant temporary differences result from
different revenue recognition policies and amortization methods. Significant
components of the Company's deferred tax liabilities and assets are as follows:
F-10
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES -- Continued
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1997
---------- --------
<S> <C> <C>
Deferred tax liabilities:
Area rights................................................................. $ 153,585 $252,342
Expense related to acquisition.............................................. 135,151 153,537
Royalties................................................................... 44,000 44,000
Other, net.................................................................. -- 14,000
---------- --------
Total deferred tax liabilities.............................................. 332,736 463,879
Deferred tax assets:
Reserve for bad debts....................................................... 267,620 127,424
Deferred revenue............................................................ 896,567 593,455
Other, net.................................................................. 96,184 --
---------- --------
Total deferred tax assets................................................... 1,260,371 720,879
Valuation allowance for deferred tax assets................................. (47,635) --
---------- --------
Deferred tax assets, net of allowance....................................... 1,212,736 720,879
---------- --------
Net deferred tax assets..................................................... $ 880,000 $257,000
---------- --------
---------- --------
</TABLE>
During the years ended June 30, 1995, 1996 and 1997, respectively, the
Company paid income taxes of $771,000 and $150,000 and $756,000, respectively.
5. TERM LOAN AND REVOLVING LINE OF CREDIT
The Company has a $10,500,000 credit facility (the Loan Agreement or
Facility) with its primary lender (the Lender) which consists of an $8,000,000
term loan and a $2,500,000 revolving line of credit and is secured by all the
assets of the Company. The term loan accrues interest, payable monthly,
calculated daily, at a rate equal to the index rate (which approximates the
prime rate) plus 2% (10.25% and 10.50% at June 30, 1996 and June 30, 1997,
respectively). On January 27, 1997, the third amendment (the Amendment) to the
Loan Agreement was executed which provided, among other things, an increase in
the term loan of approximately $2,700,000. The Amendment required the proceeds
from the term loan increase to be used to repurchase shares of the Company's
common stock and warrants from a related party (See Note 9) and to satisfy
working capital requirements. As consideration for the term loan increase, the
Company granted warrants to the Lender and another bank (See Note 9). The
$8,000,000 term loan is payable in monthly installments of approximately
$133,000 with the balance due on April 1, 1998. At June 30, 1996 and 1997,
approximately $6,133,000 and $7,067,000, respectively, was outstanding under the
term loan. The Company has begun discussions with its lender and expects to
negotiate an extension of the Facility to April 1, 2001.
The revolving line of credit accrues interest, payable monthly, at the
lender's prime rate plus 1 1/2%. Collection of the Company's accounts receivable
and proceeds from other Collateral, as defined in the Loan Agreement, are
applied daily to reduce principal amounts outstanding under the revolving line
of credit. Unpaid principal and interest outstanding on the revolving line of
credit is payable April 1, 1998. At June 30, 1996 and 1997, approximately
$1,554,000 and $1,529,000, respectively, were outstanding under the revolving
line of credit.
The Loan Agreement contains affirmative, negative and financial covenants.
Among these covenants is a requirement to submit additional payments if "excess
cash flow," as defined in the lending agreement, is generated by the Company. As
of June 30, 1997, the Company was not in compliance with a provision of the Loan
Agreement which restricts capital expenditures. The Lender subsequently agreed
to amend the terms of the capital requirements covenant for the year ended June
30, 1997.
During the years ended June 30, 1995, 1996 and 1997, the Company paid
interest of approximately $1,166,000, $875,000 and $845,000, respectively.
F-11
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1997
--------- ----------
<S> <C> <C>
Various notes and obligations payable in monthly installments. Notes
payable to banks, principal and interest payable in monthly and quarterly
installments at interest rates ranging from 10% to prime plus 3%,
collateralized by liens on vehicles and equipment........................ $ 774,963 $ 783,406
Less: current maturities................................................... (129,550) (161,098)
--------- ----------
Long-term portion.......................................................... $ 645,413 $ 622,308
--------- ----------
--------- ----------
</TABLE>
7. LEASE COMMITMENTS
At June 30, 1997, the Company has lease commitments for office space, a
training center, and a number of service center locations. These leases expire
between 1997 and 2008, with renewal options in certain of the leases. Most of
the service center location leases are subleased to franchisees. Rent expense
for office space and warehouse facilities of approximately $300,000, $308,000
and $326,000 is included in operating expenses for the year ended June 30, 1995,
1996 and 1997, respectively. Rent expense for service center locations of
approximately $465,000, $488,000 and $100,000 is recorded net of sublease income
of $114,000, $288,000 and $912,000, for the years ended June 30, 1995, 1996 and
1997, respectively.
The future minimum lease payments and related sublease payments for leases
with terms in excess of one year as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM SUBLEASE
LEASE PAYMENTS INCOME NET
-------------- ---------- ----------
<S> <C> <C> <C>
1998.................................................... $1,104,000 $ 820,000 $ 284,000
1999.................................................... 899,000 535,000 364,000
2000.................................................... 743,000 371,000 372,000
2001.................................................... 663,000 353,000 310,000
2002.................................................... 617,000 353,000 264,000
Thereafter.............................................. 1,176,000 1,148,000 28,000
-------------- ---------- ----------
$5,202,000 $3,580,000 $1,622,000
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
The above minimum lease payment schedule includes lease payments and
sublease income for N60MT and PTW, Inc. For a majority of the N60MT leases
referred to above, the sublessor remits payments directly to the landlord.
8. RELATED PARTY TRANSACTIONS
Pursuant to a Management Agreement approved by the Board of Directors of
Precision Tune Advertising Fund, Inc. (P.T.A.F., Inc.) (which includes both
franchisees and Company personnel), the Company manages the operation of
P.T.A.F., Inc. - the national advertising fund for Precision Tune Auto Care
centers. The Company charged P.T.A.F., Inc. $384,000, $384,000 and $416,000 for
administrative and other expenses incurred on behalf of P.T.A.F., Inc., during
the years ended June 30, 1995, 1996, and 1997, respectively. Based on the timing
of receipts and disbursements, it is common for amounts to be due to and from
the Company and P.T.A.F., Inc. At June 30, 1996 and 1997, the net amounts due
from P.T.A.F., Inc. were $45,000 and $44,000, respectively. These amounts are
included in accounts receivable.
Mr. John F. Ripley loaned the Company the sum of $250,000 on June 10, 1996,
in connection with the Company's acquisition of Accutune. The funds were loaned
to the Company at an interest rate of prime plus 2%. The entire loan was repaid
by the Company to Mr. Ripley on June 17, 1996, including interest of
approximately $500.
F-12
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
COMMON STOCK
During the year ended June 30, 1996, the Company completed a private
placement of 147,975 shares of Common Stock and received proceeds of
approximately $1,143,000, net of direct expenses of approximately $41,000.
TREASURY STOCK
In January 1997, the Company purchased from a former officer of the Company
and another company 247,040 shares of outstanding common stock and options to
purchase another 84,865 shares of common stock for a total price of
approximately $2,472,000. The transaction was recorded as treasury stock at
cost. To finance the purchase, the Company borrowed from its term loan in
January 1997. (See Note 5).
COMMON STOCK OPTION PLANS
In February 1996, the Company adopted the Executive Stock Option Plan under
which 175,000 shares of WE JAC Corporation common stock were reserved for the
exercise of options granted to employees or directors of the Company. The Board
of Directors determines the recipients of the award to be granted, exercise
price, vesting period, and number of shares underlying the options.
The Company applies APB 25 in accounting for its Stock Option Plan, and,
accordingly, recognizes compensation expense for any difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant. The effect of applying SFAS No. 123 on 1996 and 1997 net income
and pro forma net loss as stated below is not necessarily representative of the
effects on reported net income or loss for future years due to, among other
things, (1) the vesting period of the stock options, and (2) the fair market
value of additional stock option grants in future years. Had compensation
expense been determined based upon the fair market value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net income in 1996 and 1997 would have been approximately
$1,037,000 and $1,140,000, respectively. The fair value of the options granted
during 1996 and 1997 are estimated as $2.02 and $2.59 per share, respectively,
on the date of grant using the minimum value method with the following
assumptions: dividend yield 0%, risk-free interest rate of 6%, expected life of
5 years, and a 10 year contractual life.
Additional information with respect to Stock Option activity is summarized
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............................... 84,865 $ 2.23 84,865 $ 2.23 315,991 $ 6.31
Options granted.............................................. -- -- 231,126 7.80 213,974 10.00
Options exercised............................................ -- -- -- -- -- --
Options canceled or expired.................................. -- -- -- -- (97,365) 3.00
Outstanding, end of year..................................... 84,865 2.23 315,991 6.31 432,600 9.79
------ -------- ------- -------- ------- --------
Options exercisable.......................................... 84,865 $ 2.23 87,865 $ 2.43 111,875 $ 8.52
------ -------- ------- -------- ------- --------
------ -------- ------- -------- ------- --------
</TABLE>
The options outstanding at June 30, 1997 range in price from $7.05 to
$10.00 and have a weighted average remaining contractual life of 9.21 years.
During July 1995, the Board of Directors granted the current President of
the Company an option to purchase 80,338 shares of WE JAC Corporation common
stock at $7.05 per share. The number of shares shall increase proportionally in
order that the option continues to equal five percent of the Company's fully
diluted, issued and outstanding common stock less shares pursuant to employee
stock option and stock purchase plans. The per share price of all additional
options are at the then fair market value of the Company's common stock. At June
30, 1997, additional options totaling 12,762 have been granted. The option
expires ten years from the date of the grant. The options vest in three equal
annual installments commencing one year from the date of the grant.
F-13
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY -- Continued
On October 23, 1996, the Board of Directors granted the current President
of the Company an option to purchase 100,000 shares of WE JAC at $10.00 per
share. One half of the options vest upon the earlier of (1) the first
anniversary date of an IPO, or (2) the time following an IPO when any of the
stock of the Company held by the directors and executive officers may be sold.
The remaining 50,000 options vest upon the earlier of (1) the second anniversary
date of an IPO, or (2) the time following an IPO when any of the stock of the
Company held by the directors and executive officers may be sold.
In November 1995 and 1996, the Company offered an Employee Stock Purchase
Plan (the Plan) to encourage and facilitate the purchase of Common Stock by
employees of the Company. Under the Plan, employees of the Company who elect to
participate may purchase Common Stock at 85% of the fair market value of the
Common Stock on the commencement date of each offering period. The Plan permits
an enrolled employee to make contributions through the use of payroll deductions
or lump sum payments. The aggregate amount of stock which may be purchased under
the November 1996 plan is 20,000 shares.
COMMON STOCK WARRANTS
In December 1995, an area subfranchisor was issued a warrant to purchase
28,000 shares of common stock at the then current fair market value of $7.07 per
share. The warrants were exercisable beginning in fiscal year 1996. The warrants
expire December 31, 2002.
On January 27, 1997, the Company granted its Lender and another bank
warrants (Warrant Shares) to purchase 12,000 and 3,000 shares, respectively, of
Common Stock at $8.00 per share. The Warrant Shares expire upon the earlier of
the fifth anniversary of an IPO or April 1, 1998. Commencing June 30, 1997, the
number of Warrant Shares will be increased by 77.3336 and 19.3334 shares per
day, respectively, until the earlier of the date of the IPO or March 31, 1998.
10. JOINT VENTURE WITH PRAXIS CORPORATION
During the year ended June 30, 1996, the Company acquired a fifteen percent
interest in a joint venture with Praxis Corporation in exchange for the area
development rights to Puerto Rico and $100,000. Revenue was recognized for the
exchange of the area development rights in the amount of $100,000. The Company
also obtained an option to acquire an additional fifteen percent interest over a
three year period for a total of $150,000. The goal of the joint venture is to
incorporate a company for the purpose of acquiring and carrying on a parts
distribution business in Latin America. The Company accounts for its investment
in the joint venture using the cost method.
11. EMPLOYEES' SAVINGS PLAN
The Company maintains a 401(k) plan under which the Company may contribute
up to 50% of an employee's first 6% of compensation deferred under the plan.
Employees become eligible after attaining the age of 21 and completing six
months of employment with the Company. The employees may elect to contribute up
to 15% of their annual compensation subject to limitations set forth in the
Internal Revenue Code. Employees' contributions vest immediately. The matching
contribution vests 20% after two years and in increments of 20% each additional
year.
12. PURCHASE OF FRANCHISE RIGHTS
During the year ended June 30, 1996, Bay Area Precision, Inc. (BAP), an
area subfranchisor of the Company, acquired all of the stock of Acc-U-Tune
(AUT). AUT owned twenty-six franchise agreements located in the San Francisco
Bay Area. The Company purchased from BAP the franchise agreements and trademarks
of AUT for $850,000. Simultaneously, the Company granted BAP additional area
franchise rights for the territory occupied by the AUT franchises. The franchise
rights acquired from BAP were valued at the acquisition price less the area
franchise rights sold. Accordingly, no revenue or expense was recognized by the
Company relating to this transaction.
F-14
<PAGE>
WE JAC CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CONTINGENCIES
The Company is involved in certain litigation and is subject to unasserted
claims arising in the ordinary course of business. In the opinion of counsel and
management, the ultimate liability, if any, arising from the settlement of these
cases will not have a material adverse effect on the financial operations or
position of the Company.
14. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In late August 1997, the Company plans to enter into a Plan of
Reorganization and Agreement for Share Exchange Offers (the Agreement) with
Precision Auto Care, a newly formed corporation. In connection with the
Agreement, Precision Auto Care formed a wholly-owned subsidiary, WE JAC
Acquisition Company. If the agreement is approved by the Company's stockholders,
WE JAC Acquisition Company will be merged into the Company and the Company will
become a wholly-owned subsidiary of Precision Auto Care. Each outstanding share
of the Company will be converted into a right to receive a share of Precision
Auto Care common stock.
F-15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of Miracle
Industries, Inc. (an S Corporation) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Miracle
Industries, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
March 28, 1997
F-16
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
<S> <C> <C> <C>
1996 1995 1997
---------- ----------- -----------
<CAPTION>
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 83,388 $ 287,580 $ 59,786
Accounts receivable, less allowance of
$40,000 and $4,000 at December 31, 1996
and 1995, respectively........................................................ 794,377 214,911 610,218
Inventories...................................................................... 1,771,496 428,301 1,873,727
Prepaid expenses and other current assets........................................ 26,644 79,781 28,613
---------- ----------- -----------
Total current assets............................................................... 2,675,905 1,010,573 2,572,344
Investment in Indy Ventures, Ltd................................................... 251,286 -- 407,468
Property and equipment, net........................................................ 3,853,375 2,641,115 3,746,280
Notes receivable-related parties................................................... -- 150,000 --
Intangible assets, net:
Goodwill......................................................................... 1,515,664 482,294 1,626,428
Other............................................................................ 155,104 117,302 135,592
---------- ----------- -----------
1,670,768 599,596 1,762,020
---------- ----------- -----------
Total assets....................................................................... $8,451,334 $ 4,401,284 $8,488,112
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 469,948 $ 223,000 $ 444,950
Lines of credit.................................................................. 395,766 100,000 758,652
Accounts payable, trade.......................................................... 1,198,825 140,301 794,161
Accrued taxes and other liabilities.............................................. 490,251 157,233 502,957
---------- ----------- -----------
Total current liabilities.......................................................... 2,554,790 620,534 2,500,720
Long-term debt, net of current portion............................................. 3,449,605 1,681,741 3,809,406
Minority interest in subsidiary.................................................... 174,720 -- 163,620
---------- ----------- -----------
Total liabilities.................................................................. 6,179,115 2,302,275 6,473,746
Stockholders' equity:
Common stock, no par value; 100,000 shares
authorized; 36,919 issued and 33,619
outstanding at December 31, 1996 and 33,254
issued and outstanding at December 31, 1995................................... 2,339,700 1,973,200 2,476,100
Retained earnings (deficit)...................................................... 262,519 125,809 (131,734 )
---------- ----------- -----------
2,602,219 2,099,009 2,344,366
Treasury stock, at cost (3,300 shares)........................................... (330,000) -- (330,000 )
---------- ----------- -----------
Total stockholders' equity......................................................... 2,272,219 2,099,009 2,014,366
---------- ----------- -----------
Total liabilities and stockholders' equity......................................... $8,451,334 $ 4,401,284 $8,488,112
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes.
F-17
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1997
---------- ---------- ----------- -----------
<CAPTION>
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product and equipment sales....................................... $8,091,675 $2,259,758 $2,948,604 $2,786,412
Services.......................................................... 976,209 974,412 570,052 464,986
---------- ---------- ----------- -----------
9,067,884 3,234,170 3,518,656 3,251,398
Cost of sales and operations:
Product and equipment sales....................................... 6,879,500 1,938,418 2,494,359 2,562,722
Services.......................................................... 565,890 499,820 288,714 302,637
---------- ---------- ----------- -----------
7,445,390 2,438,238 2,783,073 2,865,359
Gross profit........................................................ 1,622,494 795,932 735,583 386,039
General and administrative expenses................................. 1,126,030 561,138 486,668 539,233
---------- ---------- ----------- -----------
Operating income (loss)............................................. 496,464 234,794 248,915 (153,194 )
Other income (expense):
Other income (expense), net....................................... 26,579 3,200 (50,692 ) (21,372 )
Interest income................................................... 13,290 10,495 -- 74
Interest expense.................................................. (341,629) (181,600) (136,378 ) (230,861 )
---------- ---------- ----------- -----------
(301,760) (167,905) (187,070 ) (252,159 )
---------- ---------- ----------- -----------
Income (loss) before minority interest.............................. 194,704 66,889 61,845 (405,353 )
Minority interest in earnings (loss) of subsidiary.................. 24,720 -- (6,390 ) 11,100
---------- ---------- ----------- -----------
Net income (loss)................................................... $ 169,984 $ 66,889 $ 68,235 $ (394,253 )
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-18
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
<S> <C> <C> <C> <C> <C>
TOTAL
NUMBER OF RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
--------- ----------- ---------- --------- -------------
Balances at January 1, 1995.............................. 32,909 $ 1,938,700 $ 58,920 $ -- $ 1,997,620
Issuance of common stock............................... 345 34,500 -- -- 34,500
Net income for 1995.................................... -- -- 66,889 -- 66,889
--------- ----------- ---------- --------- -------------
Balance at December 31, 1995............................. 33,254 1,973,200 125,809 -- 2,099,009
Issuance of common stock............................... 3,665 366,500 -- -- 366,500
Purchase of treasury stock............................. ( 3,300) -- -- (330,000) (330,000)
Net income for 1996.................................... -- -- 169,984 -- 169,984
Distributions to stockholders.......................... -- -- (33,274) -- (33,274)
--------- ----------- ---------- --------- -------------
Balance at December 31, 1996............................. 33,619 2,339,700 262,519 (330,000) 2,272,219
Net loss (unaudited)................................... -- -- (394,253) -- (394,253)
Issuance of common stock (unaudited)................... 1,364 136,400 -- -- 136,400
--------- ----------- ---------- --------- -------------
Balance at June 30, 1997 (unaudited)..................... 34,983 $ 2,476,100 $ (131,734) $(330,000) $ 2,014,366
--------- ----------- ---------- --------- -------------
--------- ----------- ---------- --------- -------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1997
----------- --------- ----------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 169,984 $ 66,889 $ 68,235 $(394,253)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................................. 413,275 287,431 186,055 253,004
Other.......................................................... 65,879 -- -- 11,100
Changes in operating assets and liabilities:
Accounts receivable......................................... (466,637) 78,354 (896,220) 184,159
Inventories................................................. (460,041) (5,550) (1,136,437) (258,413)
Prepaid expenses and other current assets................... 108,668 (26,305) 38,565 (17,543)
Accounts payable............................................ 655,763 (85,621) 794,859 (404,664)
Accrued taxes and other liabilities......................... 109,186 (40,972) 410,161 (30,403)
----------- --------- ----------- -----------
Net cash provided by (used in) operating activities.............. 596,077 274,226 (534,782) (621,927)
INVESTING ACTIVITIES
Purchases of property and equipment............................ (1,521,082) (161,336) (1,212,041) (125,000)
Issuance of notes receivable -- related parties............... -- (150,000) 200,000 --
Purchase of intangible assets.................................. -- -- (854,180) (110,764)
Net cash used in investing activities............................ (1,521,082) (311,336) (1,866,221) (235,764)
FINANCING ACTIVITIES
Proceeds from long-term debt................................... 2,181,947 553,662 2,003,041 359,801
Repayments of long-term debt................................... (1,464,360) (315,000) (42,340) (24,998)
Net proceeds on Line of Credit................................. -- -- 282,000 362,886
Distributions to stockholders.................................. (33,274) -- (33,274) --
Purchase of treasury stock..................................... (330,000) -- (330,000) --
Issuance of common shares...................................... 366,500 34,500 302,500 136,400
----------- --------- ----------- -----------
Net cash provided by financing activities........................ 720,813 273,162 2,181,927 834,089
----------- --------- ----------- -----------
Net (decrease) increase in cash and cash equivalents............. (204,192) 236,052 (219,076) (23,602)
Cash and cash equivalents, beginning of period................... 287,580 51,528 287,580 83,388
----------- --------- ----------- -----------
Cash and cash equivalents, end of period......................... $ 83,388 $ 287,580 $ 68,504 $ 59,786
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
In 1996, the Company purchased 90% of the capital stock of HydroSpray by
converting a $500,000 note receivable into common shares of HydroSpray. See Note
3.
See accompanying notes.
F-20
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Miracle Industries, Inc. and subsidiary (the Company) owns and operates 10
self-serve car wash facilities in Central Ohio, and distributes and installs car
wash equipment, chemicals and supplies nationwide.
PRINCIPALS OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its 90% owned subsidiary, HydroSpray Car Wash Equipment Co., Ltd.
(HydroSpray). HydroSpray was formed in February 1996 to acquire the assets of
Don R. Havens Company. HydroSpray manufactures and installs brushless automatic
car wash equipment. All significant intercompany accounts and transactions have
been eliminated upon consolidation.
The Company's 50% investment interest in Indy Ventures, Inc. is accounted
for using the equity method. The Company recorded an $1,800 loss related to this
investment in 1996 which is included in other expense.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of cash equivalents and trade accounts receivable. The
Company places its cash and cash equivalents with high quality financial
institutions. The Company periodically performs credit evaluations of its
customers' financial condition. Large sales of car wash equipment require
advance deposits with the balance due upon delivery and installation of the
system. A majority of the Company's revenues are to self-serve and automatic car
wash owners and operators.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market using the average
cost method and consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- --------
<S> <C> <C>
Manufacturing raw materials................................................. $ 524,239 $ 37,395
Work-in-process............................................................. 882,362 --
Finished goods.............................................................. 11,393 40,057
Equipment and supplies for resale........................................... 336,802 327,703
Other supplies.............................................................. 16,700 23,146
---------- --------
$1,771,496 $428,301
---------- --------
---------- --------
</TABLE>
REVENUE RECOGNITION
Car wash revenues are recognized at the time of service. Revenues earned on
sales of car wash equipment, chemicals and supplies are recognized upon shipment
to customers.
LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS AND GOODWILL
The Company periodically evaluates its long-lived assets to determine
whether any events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. This evaluation is based on the nature of
the asset, the future economic benefit of the asset, historical or future
profitability measures and external market conditions. If factors indicate that
the carrying amount of the asset may not be recoverable, the Company would
determine whether an impairment had occurred through the use of an undiscounted
cash flow analysis. If an impairment has occurred, the Company would
F-21
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
recognize a loss for the difference between the carrying amount and the
estimated fair value of the asset. No such impairments have occurred.
Intangible assets consist of loan fees, organization costs, covenants not
to compete, original product formulas, software development and goodwill. Loan
costs are amortized over the term of the loans, which range up to ten years.
Organization costs are amortized on a straight line basis over five years.
Covenants not-to-compete are amortized on a straight line basis over five years
and are fully amortized at December 31, 1996. Original product formulas are
amortized on a straight line basis over twenty five years. Software development
costs are being amortized over three years. Goodwill, which represents the
excess of the purchase price over the fair value of tangible net assets
acquired, is amortized on a straight line basis principally over forty years.
Amortization expense of approximately $114,000 and $90,000 was recorded during
1996 and 1995, respectively.
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Loan costs................................................................ $ 112,546 $ 112,547
Organization costs........................................................ 196,271 161,330
Covenant not-to-compete................................................... 200,000 200,000
Product formulas.......................................................... 50,000 50,000
Software development...................................................... 36,800 --
Goodwill.................................................................. 1,612,620 499,500
---------- ----------
2,208,237 1,023,377
Accumulated amortization.................................................. (537,469) (423,781)
---------- ----------
$1,670,768 $ 599,596
---------- ----------
---------- ----------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally on a straight line basis over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements............................................ 40
Equipment............................................................. 10
Vehicles.............................................................. 5
Office furniture and equipment........................................ 6-10
</TABLE>
INCOME TAXES
Miracle Industries, Inc. is a subchapter S Corporation for federal income
tax purposes. HydroSpray Car Wash Equipment Company, Ltd. is a partnership for
federal income tax purposes. The tax effects of the companies' income or loss
are passed through to the shareholders or partners individually, and no income
tax expense or liability for federal income tax purposes is provided for in
these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, accounts receivable, accounts
payable and borrowings under its short term line of credit arrangements
approximate their fair values.
ADVERTISING COSTS
Costs of advertising are expensed when incurred and totaled approximately
$221,000 and $50,000 during the years ended December 31, 1996 and 1995,
respectively.
F-22
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect certain amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land...................................................................... $ 646,650 $ 607,650
Buildings and improvements................................................ 2,267,290 1,242,799
Equipment................................................................. 1,330,741 1,059,162
Vehicles.................................................................. 204,810 177,779
Office furniture and equipment............................................ 187,142 126,303
---------- ----------
4,636,633 3,213,693
Accumulated depreciation.................................................. (783,258) (572,578)
---------- ----------
Net property, plant and equipment......................................... $3,853,375 $2,641,115
---------- ----------
---------- ----------
</TABLE>
Depreciation expense was approximately $206,000 and $185,000 during 1996
and 1995, respectively.
3. ACQUISITIONS
Effective February 29, 1996, the Company acquired a 90% interest in
HydroSpray. The acquisition was accounted for as a purchase and accordingly, the
purchase price has been allocated to the assets purchased, and liabilities
assumed based on the fair values at the date of acquisition. The excess purchase
price over the fair value of net assets acquired was approximately $1.1 million,
which the Company recorded as goodwill. The results of operations of the
acquired business have been consolidated with those of the Company since the
date of acquisition. The Company has the option to purchase the remaining 10% of
HydroSpray for $300,000. The net purchase price of HydroSpray was allocated as
follows:
<TABLE>
<S> <C>
Current assets......................................................................... $ 1,127,260
Property, plant and equipment.......................................................... 798,700
Goodwill............................................................................... 1,113,120
Current liabilities.................................................................... (1,044,031)
Long-term liabilities.................................................................. (1,345,049)
-----------
Net assets acquired.................................................................. $ 650,000
-----------
-----------
</TABLE>
The pro forma unaudited results of operations for the years ended December
31, 1996 and assuming the purchase of HydroSpray had been consummated as of
January 1, 1996, are as follows:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Revenues............................................ $9,308,389
----------
Net income.......................................... $ 74,728
----------
----------
</TABLE>
F-23
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. LINES OF CREDIT
Miracle Industries, Inc. has two $100,000 revolving lines of credit with a
bank. Interest accrues at prime plus one-half percent and is payable monthly.
HydroSpray has a $250,000 revolving line of credit with a bank. Interest accrues
at the prime rate and is payable monthly. The lines are collateralized by
specific assets of the Company and are guaranteed by the stockholders of the
company. At December 31, 1996 and 1995, $54,200 and $100,000 was available under
these lines.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
Note payable to a bank; monthly payments of $15,000 plus interest at prime
plus 1/2% through August 2005; collateralized by specific assets and
guaranteed by the stockholders of the company........................... $1,544,000 $1,724,000
Note payable to a bank; monthly payments of $17,267 plus interest at the
prime rate (fixed at 8.25% until March 1998) through March 2006;
collateralized by specific assets and guaranteed by the stockholders of
the company............................................................. 1,326,039 --
Note payable to a former stockholder; annual payments of $50,000 plus
interest at 6% through March 2001; collateralized by treasury stock..... 250,000 --
Notes payable to banks in monthly installments plus interest at rates
ranging from 6.75% to 10.75%; collateralized by specific assets and/or
guaranteed by stockholders of the company............................... 438,693 180,741
Notes payable to various local community and economic development
organization; monthly and semi-annual payments including interest up to
6%; some collateralized by specific assets and guaranteed by
stockholders of the company............................................. 112,324 --
Other..................................................................... 248,497 --
---------- -----------
Total long-term debt...................................................... 3,919,553 1,904,741
Less current maturities................................................... 469,948 223,000
---------- -----------
Long-term debt, net of current maturities................................. $3,449,605 $1,681,741
---------- -----------
---------- -----------
</TABLE>
Maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 469,948
1998............................................................ 471,594
1999............................................................ 429,514
2000............................................................ 417,557
2001............................................................ 537,152
Thereafter...................................................... 1,593,788
----------
$3,919,553
----------
----------
</TABLE>
Loan agreements with the Company's two major bank lenders require the
Company to maintain certain financial ratios and covenants. These ratios and
covenants include, but are not limited to, cash flow ratio, ratio of liabilities
to tangible net worth, minimum tangible net worth requirements and minimum debt
service coverage. The Company was not in compliance with certain covenants as of
December 31, 1996; however, lenders granted waivers of defaults through March
28, 1998.
The Company paid interest of approximately $342,000 and $182,000 during
1996 and 1995, respectively.
F-24
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. COMMITMENTS
At December 31, 1996, the Company has lease commitments for two car wash
facilities, vehicles and equipment. Rent expense under these operating leases of
approximately $104,000 and $36,000 is included in operating expenses for 1996
and 1995, respectively. The future minimum lease payments under non-cancelable
operating leases with terms in excess of one year as of December 31 are as
follows:
<TABLE>
<S> <C>
1997.............................................................. $111,000
1998.............................................................. 59,000
1999.............................................................. 38,000
2000.............................................................. 39,000
2001.............................................................. 40,000
Thereafter........................................................ 84,000
--------
$371,000
--------
--------
</TABLE>
The Company co-guaranteed $1,000,000 of borrowings by Indy Ventures, Ltd.
(Note 1). HydroSpray has guaranteed approximately $260,000 owed by a customer
who financed a car wash equipment package during 1996.
7. RELATED PARTY TRANSACTIONS
PREMA PROPERTIES, LTD.
The Company sold supplies and equipment of approximately $282,000 and
$100,000 during 1996 and 1995, respectively, to Prema Properties, Ltd., a car
wash operation of which three stockholders of Miracle Industries collectively
own 45%.
DON R. HAVENS COMPANY
A $50,000 note receivable from Don R. Havens Company outstanding at
December 31, 1995, was applied towards the purchase of HydroSpray in February
1996 (Note 1).
LUBE VENTURES, INC.
During 1995, the Company loaned Lube Ventures, Inc. $100,000 payable on
demand plus interest at 9%. Lube Ventures is wholly owned by three stockholders
of the Company. During 1996, the Company purchased $113,000 of equipment from
Lube Ventures and applied the total principal and interest due towards that
purchase.
NOTES RECEIVABLE
At December 31, 1995, the Company is owed $150,000 in notes receivable from
related parties.
MANAGEMENT FEE
The Company had a five-year management agreement with a related management
company jointly owned by four common stockholders that expired in August 1996.
The annual management fee was $85,000. Expense for 1996 and 1995 was $56,700 and
$85,000, respectively.
CONSULTING AGREEMENT
The Company agreed to compensate a consultant in shares of common stock
valued at $100 per share up to $30,000 per year through 1998. At December 31,
1996 and 1995, the Company accrued compensation expense of $30,000 and issued
300 shares of common stock.
During February 1997, a stockholder loaned the Company $500,000 for
short-term working capital requirements. The note accrues interest at prime plus
one-half percent ( 1/2%) and is due August 1997.
F-25
<PAGE>
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. PROFIT SHARING PLAN
In 1996, the Company adopted a 401(k) profit sharing plan under which it
may make discretionary matching contributions. Employees become eligible after
attaining the age of 21 and completing one year of service. Employees may elect
to contribute up to 15% of their annual compensation subject to limitations set
forth by the Internal Revenue Service. Matching contributions vest after seven
years of service. The Company made a matching contribution in 1996 of
approximately $8,400.
9. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In August 1997, the Company plans to enter into a Plan of Reorganization
and Agreement for Share Exchange Offers (the Agreement) with Precision Auto
Care, a newly formed corporation. In connection with the Agreement, Precision
Auto Care formed a wholly-owned subsidiary, Miracle Industries Acquisition
Company. If the Agreement is approved by the Company's stockholders, Miracle
Industries Acquisition Company will be merged into the Company and the Company
will become a wholly-owned subsidiary of Precision Auto Care. Each outstanding
share of the Company's common stock will be converted into a right to receive
21.442 shares of Precision Auto Care common stock.
F-26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TO THE STOCKHOLDERS
OF LUBE VENTURES, INC.
We have audited the accompanying balance sheet of Lube Ventures, Inc. (an S
corporation) as of December 31, 1996 and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lube Ventures, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
March 21, 1997
F-27
<PAGE>
LUBE VENTURES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash........................................................................................... $ 63,143 $ 152,668
Accounts receivable............................................................................ 105,535 328,321
Inventory...................................................................................... 515,017 459,612
Prepaid expenses............................................................................... 4,817 3,132
------------ -----------
Total current assets............................................................................. 688,512 943,733
Investment in Wintersville Lube Depot, LLC....................................................... 83,375 --
Property and equipment, net...................................................................... 881,707 860,740
Intangible assets, net........................................................................... 45,489 58,510
Other............................................................................................ -- 5,808
------------ -----------
Total assets..................................................................................... $1,699,083 $ 1,868,791
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................... $ 83,070 $ 139,425
Accrued expenses............................................................................... 48,747 27,379
Demand note payable to a related party......................................................... 60,000 40,000
Line of credit................................................................................. 250,000 250,000
Customer deposits.............................................................................. 76,133 68,347
Current portion, long term debt................................................................ 131,984 65,100
Deferred revenue............................................................................... 32,000 14,001
------------ -----------
Total current liabilities........................................................................ 681,934 604,252
Long term debt, net of current portion........................................................... 628,142 945,753
------------ -----------
Total liabilities................................................................................ 1,310,076 1,550,005
Stockholders' equity:
Common shares, $1 stated value; 850 shares authorized, 100 shares issued and outstanding....... 100 100
Additional paid-in capital..................................................................... 743,856 743,856
Accumulated deficit............................................................................ (354,949) (425,170)
------------ -----------
Total stockholders' equity....................................................................... 389,007 318,786
------------ -----------
Total liabilities and stockholders' equity....................................................... $1,699,083 $ 1,868,791
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
LUBE VENTURES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------- ---------------------------
1996 1995 1996 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue:
Product........................................................... $1,751,272 $ 1,165,689 $ 594,733 $ 690,119
Service........................................................... 231,058 134,680 55,100 56,681
Franchise and royalty............................................. 71,004 -- 11,681 62,411
---------- ----------- ----------- -----------
2,053,334 1,300,369 661,514 809,211
Cost of goods sold.................................................. 1,497,510 1,447,283 565,732 695,363
---------- ----------- ----------- -----------
Gross profit...................................................... 555,824 (146,914) 95,782 113,848
General and administrative expenses................................. 326,560 196,451 226,698 159,899
---------- ----------- ----------- -----------
Operating income (loss)............................................. 229,264 (343,365) (130,916) (46,051)
Other income (expense):
Interest expense.................................................. (123,090) (130,059) (51,866) (50,754)
Non-operating rebates............................................. -- 36,633 -- 301
Other............................................................. 3,625 5,000 1,000 26,283
---------- ----------- ----------- -----------
(119,465) (88,426) (50,866) (24,170)
---------- ----------- ----------- -----------
Net income (loss)................................................... $ 109,799 $ (431,791) $(181,782) $ (70,221)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-29
<PAGE>
LUBE VENTURES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (unaudited).......................... 100 $100 $ 149,900 $ (32,957) $ 117,043
Net loss for 1995 (unaudited)................................. -- -- (431,791) (431,791)
Contributed capital (unaudited)............................... -- -- 593,956 -- 593,956
------ ------ ---------- ----------- -------------
Balance at December 31, 1995 (unaudited)........................ 100 100 743,856 (464,748) 279,208
Net income for 1996........................................... -- -- -- 109,799 109,799
------ ------ ---------- ----------- -------------
Balance at December 31, 1996.................................... 100 100 743,856 (354,949) 389,007
Net loss (unaudited).......................................... -- -- -- (70,221) (70,221)
------ ------ ---------- ----------- -------------
Balance at June 30, 1997 (unaudited)............................ 100 $100 $ 743,856 $(425,170) $ 318,786
------ ------ ---------- ----------- -------------
------ ------ ---------- ----------- -------------
</TABLE>
See accompanying notes.
F-30
<PAGE>
LUBE VENTURES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- ---------------------------
1996 1995 1996 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)..................................................... $ 109,799 $(431,791) $(181,782) $ (70,221)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization....................................... 78,740 49,043 47,184 35,375
Changes in operating assets and liabilities:
Accounts receivable.............................................. (11,437) (94,098) (11,668) (222,786)
Inventory........................................................ 63,166 88,016 (62,819) 55,405
Accounts payable and accrued expenses............................ (12,306) 125,659 41,335 27,201
Deferred revenue................................................. 32,000 -- -- (17,999)
Other............................................................ (6,602) 55,278 49,815 (22,896)
--------- ----------- ----------- -----------
Net cash provided by (used in) by operating activities................ 253,360 (207,893) (117,935) (215,921)
INVESTING ACTIVITIES
Purchase of property and equipment.................................. (117,393) (449,373) (43,134) (8,656)
Purchase of intangible assets....................................... -- (26,984) -- --
Purchase of investment.............................................. (83,375) -- (60,000) --
Net sale of investment.............................................. -- -- -- 83,375
Issuance of note receivable......................................... -- -- -- --
--------- ----------- ----------- -----------
Net cash provided by (used in) investing activities................... (200,768) (476,357) (103,134) 74,719
FINANCING ACTIVITIES
Net proceeds (payments) long-term debt.............................. 105,231 (13,983) 136,308 230,727
Net proceeds (payments) of related party loans...................... (185,000) 185,000 -- --
Proceeds from contributed capital................................... -- 593,956 -- --
Payments on shareholder loans....................................... -- (15,522) 9,661 --
--------- ----------- ----------- -----------
Net cash (used in) provided by financing activities................... (79,769) 749,451 145,969 230,727
--------- ----------- ----------- -----------
Net (decrease) increase in cash....................................... (27,177) 65,201 (75,100) 89,525
Cash, beginning of period............................................. 90,320 25,119 90,320 63,143
--------- ----------- ----------- -----------
Cash, end of period................................................... $ 63,143 $ 90,320 $ 15,220 $ 152,668
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-31
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Lube Ventures, Inc. (the Company) manufactures and franchises modular
automobile oil change and lubrication facilities and owns and operates one
automobile lubrication retail site, which services individual motorists.
Franchisees purchase a modular oil change facility, pay an initial franchise
fee, pay royalty fees of 5% of monthly franchise gross revenues or a flat
monthly rate.
INVESTMENT
The Company's 50% investment interest in Wintersville Lube Depot, LLC, a
limited liability company, is accounted for using the equity method. The Company
recorded income of approximately $2,600 in 1996 related to this investment which
is included in other income. (See Note 7).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of cash equivalents and trade accounts receivable. The
Company places its cash and cash equivalents with high quality financial
institutions. The Company periodically performs credit evaluations of its
customers' financial condition. Although customers are occasionally granted
interim credit, sales of modular units are typically paid in full upon delivery
and installation of the unit. The market for quick automobile oil change and
lubrication services is primarily individuals and businesses owning automobiles.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are priced at the lower of cost or market using the average
cost method and consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Manufacturing raw materials....................................... $131,391
Work-in-process................................................... 22,348
Finished goods.................................................... 325,851
Supplies.......................................................... 35,427
--------
$515,017
--------
--------
</TABLE>
REVENUE RECOGNITION
Revenues from automobile oil change and lubrication services are generally
paid in cash and are recognized at the time of service. Revenue earned on sales
of modular automobile lubrication units is recognized upon shipment to
customers. Revenue from the sale of a franchise is recognized once certain
obligations to the franchisee are met. Revenue from royalty fees are recognized
when received.
LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets to determine
whether any events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. This evaluation is based on the nature of
the asset, the future economic benefit of the asset, historical or future
profitability measures and external market conditions. If factors indicate that
the carrying amount of the asset may not be recoverable, the Company would
determine whether an impairment had occurred through the use of an undiscounted
cash flow analysis. If an impairment has occurred, the Company would recognize a
loss for the difference between the carrying amount and the estimated fair value
of the asset. No such impairments have occurred.
F-32
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
INTANGIBLE ASSETS
Intangible assets consist primarily of franchise rights, facility plans and
drawings and organization costs and are amortized on a straight line basis over
five years. Amortization expense was approximately $12,000 and $10,000 during
1996 and 1995, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally on a straight line basis over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements............................................. 40
Equipment.............................................................. 10
Vehicles............................................................... 5
Office furniture and equipment......................................... 6-10
</TABLE>
INCOME TAXES
The Company is a subchapter S corporation for federal income tax purposes.
The tax effects of the Company's income or loss are passed through to the
shareholders individually, and no income tax expense or liability for federal
income tax purposes is provided for in these financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, accounts receivable, accounts
payable and borrowings under its short term lines of credit arrangements
approximate their fair values.
ADVERTISING COSTS
Costs of advertising are expensed when incurred and totaled approximately
$78,000 and $69,000 during the years ended December 31, 1996 and 1995,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Land.................................................................................... $202,275
Buildings and improvements.............................................................. 466,140
Equipment............................................................................... 37,762
Vehicles................................................................................ 112,698
Office furniture and equipment.......................................................... 108,202
Property under capital lease............................................................ 62,971
------------
990,048
Accumulated depreciation................................................................ (108,341)
------------
Net property, plant and equipment....................................................... $881,707
------------
------------
</TABLE>
F-33
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. PROPERTY, PLANT AND EQUIPMENT -- Continued
Depreciation expense was approximately $66,000 and $39,000 in 1996 and
1995, respectively. The cost and net book value of assets recorded under capital
leases was $62,971 at December 31, 1996. Amortization of leased assets is
included in depreciation and amortization expense.
3. FRANCHISE OBLIGATIONS, FEES AND ROYALTIES
The Company offers its modular oil change and lubrication units to
customers through ten year franchise agreements. The purchased franchise, "Lube
Depot," provides the franchisee the lubrication unit, auxiliary equipment,
training, delivery and assembly. During 1996, the Company recorded $60,600 in
franchise fee revenue and $10,400 in royalty revenue. Included in intangible
assets at December 31, 1996 are franchise organization costs of approximately
$19,000.
4. LINE OF CREDIT
The Company has a $250,000 revolving line of credit with a bank which
expires in November 1999. Interest accrues at prime plus one and one-half
percent and is payable monthly. The line is collateralized by real estate,
equipment, inventories and is guaranteed by the stockholders of the Company. At
December 31, 1996, no further borrowings were available under the line.
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Notes payable to banks and capital lease obligations, monthly payments ranging from $500
to $5,000 plus interest rates ranging from 9.5% to 10.75%, collateralized by specific
assets and guaranteed by the stockholders of the Company............................... $ 760,126
Less current maturities.................................................................. (131,984)
---------
Long-term debt, net of current maturities................................................ $ 628,142
---------
---------
</TABLE>
Maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997...................................................................................... $131,984
1998...................................................................................... 143,086
1999...................................................................................... 147,848
2000...................................................................................... 100,170
2001...................................................................................... 69,951
Thereafter................................................................................ 167,087
--------
$760,126
--------
--------
</TABLE>
The Company was not in compliance with covenants in certain loan agreements
with respect to approximately $328,000 of outstanding long-term debt. The
lenders involved have amended the related agreements to permit the Company to be
in compliance with such covenants through March 21, 1998.
The Company paid interest of approximately $123,000 and $130,000 during
1996 and 1995, respectively.
6. RELATED PARTY TRANSACTIONS
MIRACLE INDUSTRIES, INC.
During 1995, the Company borrowed $100,000 from Miracle Industries, Inc., a
related party through common ownership, payable on demand plus interest at 9%.
During 1996, the Company sold two modular lubrication facilities and a computer
for a total sales price of $113,000 to Miracle Industries, Inc. In lieu of cash
payment, Miracle Industries, Inc. applied the purchase price to the principal
and interest balance due.
F-34
<PAGE>
LUBE VENTURES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. RELATED PARTY TRANSACTIONS -- Continued
MIRACLE PARTNERS, INC.
During 1996, the Company borrowed $81,500 from Miracle Partners, Inc. The
balance was repaid at December 31, 1996. A $25,000 note payable to Miracle
Partners, Inc. outstanding at December 31, 1995, was repaid during 1996.
ACCOUNTS RECEIVABLE
At December 31, 1996, the Company is owed approximately $67,000 in accounts
receivable from related parties.
DEMAND NOTES PAYABLE
At December 31, 1996, the Company owes $60,000 in demand notes to related
parties.
7. SUBSEQUENT EVENTS
In February 1997, the Company sold its 50% interest in Wintersville Lube
Depot, LLC for $100,000.
Effective March 6, 1997, the Company received a guaranty loan in the amount
of $750,000 from the First National Bank of Zanesville. Seventy-five percent of
the loan is guaranteed by the U.S. Small Business Administration. The interest
rate on the guaranteed portion is 9.75% and 8.25% on the unguaranteed portion,
to be adjusted every five years. The loan will expire in March 2020. The
majority of the proceeds were used to pay off the line of credit and selected
outstanding debt balances.
8. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In August 1997, the Company plans to enter into a Plan of Reorganization
and Agreement for Share Exchange Offers (the Agreement) with Precision Auto
Care, a newly formed corporation. In connection with the Agreement, Precision
Auto Care formed a wholly-owned subsidiary, Lube Ventures Acquisition Company.
If the Agreement is approved by the Company's stockholders, Lube Ventures
Acquisition Company will be merged into the Company and the Company will become
a wholly-owned subsidiary of Precision Auto Care. Each outstanding share of the
Company's common stock will be converted into a right to receive 1,691.680
shares of Precision Auto Care common stock.
F-35
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND PARTNERS
PREMA PROPERTIES, LTD.
We have audited the accompanying balance sheet of Prema Properties, Ltd. (a
Limited Liability Company) as of December 31, 1996 and the related statements of
operations, members' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prema Properties, Ltd., as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
March 21, 1997
F-36
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash........................................................................................... $ 66,825 $ 31,960
Inventory...................................................................................... 12,000 12,000
------------ -----------
Total current assets............................................................................. 78,825 43,960
Investment....................................................................................... 67,698 67,698
Property and equipment, net...................................................................... 3,108,087 3,031,981
------------ -----------
Total assets..................................................................................... $3,254,610 $ 3,143,639
------------ -----------
------------ -----------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Note payable, related party.................................................................... $ 448,793 $ 578,793
Accounts payable............................................................................... 85,080 48,363
Current maturities, capital lease obligations.................................................. 14,960 16,500
Current maturities, long term debt............................................................. 172,600 228,300
------------ -----------
Total current liabilities........................................................................ 721,433 871,956
Capital lease obligations, net of current maturities............................................. 114,242 105,479
Long term debt, net of current maturities........................................................ 2,226,097 2,078,544
------------ -----------
Total liabilities................................................................................ 3,061,772 3,055,979
Total members' equity............................................................................ 192,838 87,660
------------ -----------
Total liabilities and members' equity............................................................ $3,254,610 $ 3,143,639
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-37
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
JUNE 30,
------------------------ --------------------------
1996 1995 1996 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenue.................................................................. $ 672,161 $ 353,854 $ 311,927 $ 389,682
Direct operating costs................................................... 608,705 234,738 374,278 323,263
--------- ----------- ----------- -----------
Gross profit........................................................... 63,456 119,116 (62,351) 66,419
General and administrative expenses...................................... 52,354 24,834 31,060 23,454
--------- ----------- ----------- -----------
Operating income (loss).................................................. 11,102 94,282 (93,411) 42,965
Other income (expense):
Interest expense....................................................... (214,143) (76,659) (77,935) (148,143)
Other income (expense)................................................. 10,578 (4,380) -- --
--------- ----------- ----------- -----------
(203,565) (81,039) (77,935) (148,143)
--------- ----------- ----------- -----------
Net (loss) income........................................................ (192,463) 13,243 (171,346) (105,178)
Members' equity, beginning of year....................................... 385,301 372,058 385,301 192,838
--------- ----------- ----------- -----------
Members' equity, end of year............................................. $ 192,838 $ 385,301 $ 213,955 $ 87,660
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-38
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net (loss) income.................................................. $ (192,463) $ 13,243 $ (171,346) $(105,178)
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization.................................... 164,473 86,490 65,790 101,844
Other............................................................ (10,578) 4,380 -- --
Changes in operating assets and liabilities:
Inventory..................................................... (7,500) (4,500) (12,500) --
Accounts payable.............................................. 74,623 10,457 25,629 (36,717)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities................ 28,555 110,070 (92,427) (40,051)
INVESTING ACTIVITIES
Net purchases of property and equipment.......................... (1,931,950) (122,248) (1,640,376) (25,738)
Purchase of investment........................................... -- (61,500) -- --
Other............................................................ (23,365) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities:............................. (1,955,315) (183,748) (1,640,376) (25,738)
FINANCING ACTIVITIES
Proceeds from notes payable...................................... 348,793 185,000 117,398 130,000
Principal payments under capital lease obligation................ (4,548) -- -- (7,223)
Proceeds from long-term debt..................................... 1,766,482 -- 1,700,954 --
Principal payments on long-term debt............................. (146,780) (83,230) -- (91,853)
----------- ----------- ----------- -----------
Net cash provided by financing activities.......................... 1,963,947 101,770 1,818,352 30,924
----------- ----------- ----------- -----------
Net increase (decrease) in cash.................................... 37,187 28,092 85,549 (34,865)
Cash, beginning of period.......................................... 29,638 1,546 29,638 66,825
----------- ----------- ----------- -----------
Cash, end of period................................................ $ 66,825 $ 29,638 $ 115,187 $ 31,960
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-39
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Prema Properties, Ltd. (the Company), owns and operates self-serve car wash
facilities and a quick lube facility in eight locations throughout Ohio.
Virtually all of the Company's customers are individual automobile owners.
INVESTMENTS
The Company's 50% investment interest in Tamarack Circle Car Wash, a
general partnership, is accounted for using the equity method. The Company
recorded approximately $11,000 of income in 1996 related to this investment
which is included in other income.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of chemicals and supplies and are priced at the lower
of cost or market using the average cost method.
REVENUE RECOGNITION
Car wash revenues are received in cash and recognized at the time of
service.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally on a straight line basis over the estimated useful lives of the
related assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements................................. 40
Equipment.................................................. 10
</TABLE>
INCOME TAXES
The Company is an Ohio limited liability corporation, and is treated as a
partnership for federal income tax purposes. The tax effect of the Company's
income or loss is passed through to the members individually and no income tax
expense or liability for federal income tax purposes is provided for in these
financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, accounts payable and demand
notes payable approximate their fair values.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect certain amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-40
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1996:
<TABLE>
<S> <C>
Land........................................................................ $ 471,352
Buildings and improvements.................................................. 1,118,934
Equipment................................................................... 1,764,726
----------
3,355,012
Accumulated depreciation.................................................... (246,925)
----------
Net property, plant and equipment........................................... $3,108,087
----------
----------
</TABLE>
Depreciation expense was approximately $164,000 and $86,000 during 1996 and
1995 respectively. During 1996, the Company purchased $133,750 in office
equipment under capital leases. The net book value of these assets was $128,177
at December 31, 1996. Amortization of leased assets is included in depreciation
and amortization expense.
3. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Various notes payable to banks; monthly payments ranging from $1,200 to
$9,600, plus interest at rates ranging from 9% to 10.25%; collateralized
by real estate............................................................ $2,398,697
Less current maturities..................................................... 172,600
----------
Long-term debt, net of current maturities................................... $2,226,097
----------
----------
</TABLE>
Maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................ $ 172,600
1998................................................ 326,000
1999................................................ 514,500
2000................................................ 123,500
2001................................................ 133,900
Thereafter.......................................... 1,128,197
----------
$2,398,697
----------
----------
</TABLE>
The Company paid interest of approximately $214,000 and $77,000 during 1996
and 1995, respectively.
Included in 1996 interest expense is approximately $31,000 of interest paid
to a related party. (See Note 5).
4. CAPITAL LEASE OBLIGATIONS
The future minimum lease payments under capital lease obligations as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................................................................... $ 31,862
1998.......................................................................... 37,884
1999.......................................................................... 40,895
2000.......................................................................... 40,895
2001.......................................................................... 27,264
--------
Net minimum lease payments.................................................... 178,800
Amount representing interest.................................................. (49,598)
--------
Present value of net minimum lease payments, including current maturities of
$14,960..................................................................... $129,202
--------
--------
</TABLE>
F-41
<PAGE>
PREMA PROPERTIES, LTD.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. RELATED PARTY TRANSACTIONS
MIRACLE INDUSTRIES, INC. AND SUBSIDIARY
The Company purchased car wash supplies and equipment of approximately
$282,000 and $100,000 during 1996 and 1995, respectively from Miracle
Industries, Inc., a company with common ownership. At December 31, 1996,
accounts payable to Miracle Industries, Inc. totaled $58,436.
NOTE PAYABLE
The Company holds a note payable to Pella Company, which bears interest at
9.25% and is payable on demand. Pella Company is a related party through common
ownership, and manages the operations of the Company. The note was extended to
the Company to finance the purchase of additional property and equipment. At
December 31, 1996 the balance due was $448,793. (See Note 3).
6. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In August 1997, the Company plans to enter into a Plan of Reorganization
and Agreement for Exchange Share Offers (the Agreement) with Precision Auto
Care, a newly formed corporation. In connection with the Agreement, Precision
Auto Care has agreed to make an offer to exchange 1,488.890 shares of Precision
Auto Care common stock for each outstanding one percentage membership interest
of the Company.
F-42
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
PRECISION AUTO CARE, INC.
We have audited the accompanying balance sheet of Precision Auto Care, Inc.
as of June 30, 1997. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Precision Auto Care, Inc. at
June 30, 1997 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
August 15, 1997
F-43
<PAGE>
PRECISION AUTO CARE, INC.
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Cash............................................................................................................... $1,000
------
------
LIABILITIES AND STOCKHOLDER EQUITY
Preferred stock, $.01 par; 1,000,000 shares authorized;
0 shares issued and outstanding................................................................................. --
Common stock; $.01 par; 19,000,000 shares authorized; 100 shares issued and
outstanding..................................................................................................... 1
Additional paid-in capital......................................................................................... $ 999
------
$1,000
------
------
</TABLE>
See accompanying Notes.
F-44
<PAGE>
PRECISION AUTO CARE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION
Precision Auto Care, Inc. was incorporated in April 1997 and has conducted
no business as of June 30, 1997 and was organized to carry out a proposed Plan
of Reorganization.
F-45
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER TO SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE OFFICERS OF THE COMPANY SINCE THE DATE
HEREOF OR SINCE THE DATE AS OF WHICH INFORMATION IS SET FORTH HEREIN.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................. 3
Summary Financial Data.......................... 5
Risk Factors.................................... 7
Use of Proceeds................................. 12
Dividend Policy................................. 12
Capitalization.................................. 13
Dilution........................................ 13
Unaudited Pro Forma Combined Financial
Statements.................................... 14
Selected Financial Data......................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 21
Business........................................ 33
Management...................................... 47
Principal and Selling Shareholders.............. 54
The Combination................................. 54
Certain Transactions............................ 59
Description of Capital Stock.................... 62
Shares Eligible for Future Sale................. 64
Underwriting.................................... 66
Legal Matters................................... 67
Experts......................................... 67
Available Information........................... 67
Index to Financial Statements................... F-1
</TABLE>
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UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,340,000 SHARES
[LOGO TO BE SUPPLIED]
COMMON STOCK
----------------
PROSPECTUS
----------------
A.G. EDWARDS & SONS, INC.
FERRIS, BAKER WATTS,
Incorporated
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses in connection with the
distribution of the securities being registered hereunder, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee.................................................. $ 8,817
NASD filing fee......................................................................... 3,500
Blue Sky fees and expenses.............................................................. 10,000
Printing and engraving expenses......................................................... 100,000
Legal fees and expenses................................................................. 700,000
Accounting fees and expenses............................................................ 660,000
Transfer agent and registrar's fees..................................................... 10,000
Miscellaneous expenses.................................................................. 7,683
----------
Total.............................................................................. $1,500,000
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----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of the Company provide that, to the fullest
extent permitted by the Virginia Stock Corporation Act, the Company shall
indemnify current and former directors and officers of the Company against any
and all liabilities and expenses in connection with their services to the
Company in such capacities. The Articles of Incorporation further mandate that
the Company shall advance expenses to its directors and officers to the full
extent permitted by the Virginia Stock Corporation Act. The Articles of
Incorporation also permit the Company, by action of its Board of Directors, to
indemnify its employees and agents with the same scope and effect as the
foregoing indemnification of directors and officers.
The Articles of Incorporation of the Company provide that, to the fullest
extent permitted by the Virginia Stock Corporation Act, no director or officer
of the Company shall be personally liable to the Company or its stockholders for
monetary damages. Under current Virginia law, the effect of this provision is to
eliminate the rights of the Company and its stockholders to recover monetary
damages against a director or officer except for the director or officer's (a)
willful misconduct, (b) knowing violation of any criminal law or of any federal
or state securities law, including (without limitation), any claim of unlawful
insider trading or manipulation of the market for any security, or (c) payment
of unlawful distributions, including dividends and stock redemptions.
The Articles of Incorporation of the Company authorize the Company to
purchase liability insurance for its officers and directors and the Company
currently maintains such insurance coverage on behalf of its officers and
directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the organization of the Company, 100 shares of Common
Stock were issued to WE JAC Corporation for a purchase price of $1,000 in
transactions which were exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section
4(2) thereof. WE JAC Corporation represented that it was acquiring such shares
for investment purposes only and not with a view to distribution within the
meaning of the Securities Act. The stock certificates representing such shares
bear restrictive legends. Such shares will be canceled in connection with the
closing of the Mergers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement among Precision Auto Care, Inc. (the "Company"), A.G. Edwards & Sons, Inc.
and Ferris, Baker Watts, Incorporated.*
2.1 Plan of Reorganization and Agreement for Combination of Businesses dated as of August 27, 1997 by and
among the Company, WE JAC Corporation, Miracle Industries, Inc., Lube Ventures, Inc., Rocky Mountain
Ventures, Inc., Rocky Mountain Ventures II, Inc., Miracle Partners, Inc., Prema Properties, LLC, Ralston
Car Wash, LLC and KBG LLC.**
3.1 Articles of Incorporation of the Company.**
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
3.2 By-Laws of the Company.**
4.1 Form of stock certificate.*
5 Opinion of Miles & Stockbridge, a Professional Corporation.*
10.1 WE JAC Corporation 1996 Stock Option Plan.**
10.2 WE JAC Corporation 1997 Employee Stock Purchase Plan.**
10.3 Precision Auto Care 1997 Stock Option Plan.**
10.4 Employment Agreement between the Company and John F. Ripley*.
10.5 Employment Agreement between the Company and James A. Hay.**
10.6 Employment Agreement between the Company and William Klumb*.
10.7 Employment Agreement between the Company and Arnold Janofsky.**
10.8 Employment Agreement between the Company and Grant G. Nicolai.**
10.9 Employment Agreement between the Company and Peter Kendrick.**
10.10 Consulting Agreement between the Company and Ernest Malas.*
21 Subsidiaries of the Company.
23.1 Consents of Ernst & Young LLP, independent auditors.
23.2 Consent of Miles & Stockbridge, a Professional Corporation (included in the opinion filed as Exhibit 5).*
24 Powers of Attorney.**
27 Financial Data Schedule.*
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions of its
Certificate of Incorporation, Bylaws or laws of the Commonwealth of Virginia or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration in reliance upon Rule 403A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Pre-effective Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Baltimore, State of Maryland, on October 2, 1997.
PRECISION AUTO CARE, INC.
By:__________________*_________________
JOHN F. RIPLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on this 2nd day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------------- ----------------
<S> <C> <C>
* Director October 2, 1997
LYNN E. CARUTHERS
* President and Chief Executive Officer and October 2, 1997
JOHN F. RIPLEY Director
/s/ Peter Kendrick Senior Vice President -- Finance Officer October 2, 1997
PETER KENDRICK (Principal Financial and Accounting Officer)
* Director October 2, 1997
WOODLEY A. ALLEN
* Director October 2, 1997
GEORGE BAVELIS
* Director October 2, 1997
BERNARD H. CLINEBURG
* Director October 2, 1997
CLARENCE E. DEAL
* Director October 2, 1997
EFFIE ELIOPULOS
* Director October 2, 1997
BASSAM IBRAHIM
* Director October 2, 1997
ARTHUR KELLAR
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------------- ----------------
<S> <C> <C>
Director October 2, 1997
RICHARD O. JOHNSON
* Director October 2, 1997
HARRY G. PAPPAS, JR.
* Director October 2, 1997
GERALD ZAMENSKY
* Director October 2, 1997
WILLIAM R. KLUMB
*By:/s/ Arnold Janofsky
ARNOLD JANOFSKY
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
WE JAC Acquisition Subsidiary, Inc.
Miracle Industries Acquisition Subsidiary, Inc.
Lube Ventures Acquisition Subsidiary, Inc.
Rocky Mountain I Acquisition Subsidiary, Inc.
Rocky Mountain II Acquisition Subsidiary, Inc.
<PAGE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 15, 1997, with respect to the financial
statements and financial statement schedule of WE JAC Corporation, included in
the Pre-effective Amendment No. 1 to the Registration Statement (Form S-1 dated
on or about October 2, 1997) and related Prospectus of Precision Auto Care, Inc.
for the registration of 2,300,000 shares of its common stock.
<TABLE>
<S> <C>
Vienna, Virginia /s/ Ernst & Young LLP
October 2, 1997
</TABLE>
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 28, 1997, with respect to the financial statements
of Miracle Industries, Inc., included in the Pre-effective Amendment No. 1 to
the Registration Statement (Form S-1 dated on or about October 2, 1997) and
related Prospectus of Precision Auto Care, Inc. for the registration of
2,300,000 shares of its common stock.
<TABLE>
<S> <C>
Vienna, Virginia /s/ Ernst & Young LLP
October 2, 1997
</TABLE>
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 21, 1997, with respect to the financial statements
of Lube Ventures, Inc., included in the Pre-effective Amendment No. 1 to the
Registration Statement (Form S-1 dated on or about October 2, 1997) and related
Prospectus of Precision Auto Care, Inc. for the registration of 2,300,000 shares
of its common stock.
<TABLE>
<S> <C>
Vienna, Virginia /s/ Ernst & Young LLP
October, 1997
</TABLE>
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 21, 1997, with respect to the financial statements
of Prema Properties, Ltd., included in the Pre-effective Amendment No.1 to the
Registration Statement (Form S-1 dated on or about October 2, 1997) and related
Prospectus of Precision Auto Care, Inc. for the registration of 2,300,000 shares
of its common stock.
<TABLE>
<S> <C>
Vienna, Virginia /s/ Ernst & Young LLP
October 2, 1997
</TABLE>
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 15, 1997, with respect to the financial
statements of Precision Auto Care, Inc., included in the Pre-effective Amendment
No. 1 to the Registration Statement (Form S-1 dated on or about October 2, 1997)
and related Prospectus of Precision Auto Care, Inc. for the registration of
2,300,000 shares of its common stock.
<TABLE>
<S> <C>
Vienna, Virginia /s/ Ernst & Young LLP
October 2, 1997
</TABLE>
<PAGE>
